What's at Stake? Understanding the Role of Home Equity in Flood Insurance Demand
This working paper finds that as home equity increases, so does demand for flood insurance—a finding with major implications for understanding climate change's impact on housing.
Abstract
Millions of properties are exposed to increasing threats from natural disasters. Yet, many at-risk homes are uninsured against the costliest disaster: flooding. We show that low home equity is an important driver of low flood insurance take-up. To isolate the causal effect of home equity on flood insurance demand, we exploit price changes over the housing boom and bust. Insurance take-up follows house price dynamics closely, with a home price elasticity around 0.3. Multiple mechanism tests suggest that mortgage default acts as implicit disaster insurance. As a result, households do not fully internalize their disaster risk.
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