Adjusting to natural disasters

Abstract

People can answer the risks presented by natural disasters in a number of ways; they can move out of harms way, they can self protect, or they can insure. This paper uses the largest U.S. natural disaster on record, Hurricane Andrew, to evaluate how people and housing markets respond to a large disaster. Our analysis combines a unique ex post database on the storm’s damage along with information from the 1990 and 2000 Censuses as well as information on housing sales in Dade County, Florida where the storm hit. The results suggest that the economic capacity of households to adjust explains most of the differences in demographic groups’ patterns of adjustment to the hurricane damage. Low income households respond primarily by moving into low-rent housing in areas that experienced heavy damage. Middle income households move away to avoid risk, and the wealthy, for whom insurance and self-protection is most affordable, remain. This pattern of adjustment is roughly mean neutral, so an analysis based on summary measures would miss these important adjustments. Our analysis of the housing sales record indicates that the new risk information provided by the event reduced the rate of appreciation in prices by about fifty percent for the zones with the highest FEMA flood risk ratings. This finding is corroborated at the qualitative level by the Census data.