Stocks, flows, and flood insurance: A nationwide analysis of the capitalized impact of annual premium discounts on housing values

Abstract

To approach fiscal solvency in the face of escalated intensity and frequency of natural disasters, The National Flood Insurance Program is increasing flood insurance premiums. Despite widespread concerns over the affordability of higher premiums, less attention has been paid to the impact of premium rate increases on housing values. Should housing values capitalize premium discounts, their removal could entail losses in home equity and net wealth, property tax revenue shortfalls for local governments, and relocation disincentives for vulnerable homeowners. We use the quasi-experimental nature of eligibility criteria for the largest class of flood insurance premium discounts to causally estimate the capitalization of flood insurance premium subsidies using nationwide and city-specific hedonic difference-in-difference regressions. We find that in a nationally pooled sample, the average capitalization of subsidy eligibility is $12,352 and show that capitalization exhibits significant and intuitive heterogeneity across municipalities. Our results inform policy discussions surrounding the transition to the national Risk Rating 2.0 premium schedule.