Housing and mortgage markets with climate risk: Evidence from california wildfires

Abstract

housing and mortgage markets with climate risk: evidence from california wildfires∗ paulo issler† richard stanton‡ carles vergara-alert§ nancy wallace¶ may 23, 2024 abstract this paper studies the effects of wildfires on housing and mortgage markets. we motivate our empirical investigation with a game-theoretic model of homeowners’ decisions to rebuild or improve their homes, considering both neighborhood externalities and insurance. we test the model’s implications using california data from 2001 to 2020. we find an increase in house prices and square footage in wildfire treatment areas five years post-fire. we also find decreases in mortgage terminations, but little evidence of gentrification. our analysis of expected wildfire losses challenges the ability of insurance companies to absorb these losses without a serious reconsideration of property- and casualty-insurance pricing in california. jel classification: g21, g54. keywords: housing, mortgages, climate risk, household finance, moral hazard. ∗we are grateful for financial support from the fisher center for real estate and urban economics. vergaraalert acknowledges financial support from the social trends institute foundation 2022, the state research agency of the spanish ministry of science, innovation and universities mcin/aei/10.13039/501100011033 erdf (grant ref. pgc2018-097335-a-i00), and nextgenerationeu/prtr (grant ref. ted2021-131238b-i00). for helpful comments and suggestions, we thank cristian badarinza, …

Source: pdf_first_chars