Storm surges, informational shocks, and the price of urban real estate: An application to the case of Hurricane Sandy

Abstract

The impacts of a major hurricane on residential real estate can be devastating. Hurricane Sandy in New York City (NYC) is among the examples of how flooding can unexpectedly extend beyond FEMA flood zones. Such surprises or negative shocks can provide property owners—especially those not flooded—with new information about future flood risks, based on the difference of the property distance from the mapped flood zone and the distance to the actual locations of flooding. We use a difference-in-differences approach to quantify the effects of these shocks on residential property values for non-flooded NYC properties after Sandy. The short-run negative “surprise” effect was to lower NYC housing prices by about 6%–7% for each mile (or about 2% per standard deviation) difference between the property distance from the flood zone and the distance to the actual locations of flooding. The corresponding positive “surprise” effect is insignificant. The long-term surprise effects of flood risk on housing prices tend to disappear, as residents’ memories of the surprise fade and they seem to only recall the actual storm surge several years after the hurricane.