Florida and other states have passed legislation that requires realtors to inform homebuyers about flood risk. But some of those disclosures may not provide enough clarity for homeowners and homebuyers to effectively manage their decisions based on risk.
The state of Florida recently passed a law that mandates the disclosure of flood risk in property sales. The adoption of this law adds Florida to the list of 32 other states that have a requirement to disclose flood risk.
Having information about flood risk, and other kinds of natural hazards such as wildfires, is essential for people to make educated decisions about where to live, what kind of insurance to have, and how much to invest in floodproofing and other kinds of hazard mitigation on their properties. So, exactly what information should be provided, and will people actually use the information in ways that reduce their overall exposure to risk?
Shortcomings of Two Common Disclosure Requirements
The new law in Florida requires sellers to disclose two pieces of information to prospective homebuyers: whether sellers have filed a flood insurance claim, and whether sellers have received federal financial assistance due to flood damage on the property. Both kinds of disclosure have shortcomings.
Flood Insurance Claims
Standard homeowners insurance policies do not cover flood damage. Homeowners must buy a separate flood policy, which mainly is provided through the National Flood Insurance Program. If a property is in a designated 100-year floodplain—what the Federal Emergency Management Agency (FEMA) calls a Special Flood Hazard Area—the owner is required to purchase flood insurance if they have a mortgage on the property that is backed by the federal government.
More than 827,000 claims with the National Flood Insurance Program have been filed in Florida since 1978, according to data from FEMA. In 2022, 9.9 million units of housing existed in the state. So, roughly 8.4 percent of the homes that currently exist in Florida have filed a claim for flood damage over the past 46 years.
This figure almost certainly is an underestimate of the actual number of homes in Florida that are at risk of significant flooding: a recent study put the number at 18.2 percent, or 1.8 million homes.
The main problem with using flood insurance claims to infer flood risk is that take-up rates for flood insurance—and thus the number of flood claims—are notoriously low.
Relying on flood insurance claims is not ideal for gleaning accurate information about flood risk across properties.
After every major flood event, stories abound about the low percentage of damaged homes that were covered by flood insurance; for example, only 5 percent of damaged homes were covered during the floods in South Carolina in 2015, with only 1.2 percent of homes insured during the floods in eastern Kentucky in 2022. Take-up rates in Florida are higher than in other states—FEMA estimated in 2018 that 46 percent of homes in the 100-year floodplain in Florida had flood insurance—but even in Florida, many homes remain uninsured, especially outside the official floodplain.
Another deficiency with the disclosure of insurance claims is that homeowners may not have lived in their homes long enough to have experienced a flood and filed a claim. And although the occurrence of a flood certainly is correlated with underlying flood risk, the two don’t perfectly match up. Just because a disaster hasn’t struck yet (and an insurance claim hasn’t been filed) doesn’t mean that a flood won’t strike in the future. Many communities in the United States have experienced significant property damage from a single major event.
All of this evidence suggests that relying on flood insurance claims is not ideal for gleaning accurate information about flood risk across properties.
Federal Disaster Assistance
Florida also requires homeowners to disclose whether they have received federal assistance after a flood. Federal assistance is made available when a flood is bad enough to be officially declared a disaster; minor floods will not trigger the release of federal aid. When federal assistance is made available, homeowners have to apply for it, and the application is an onerous process that not everyone chooses to go through.
Even for those homeowners who do go through the application process, the number that the federal government approves to receive assistance often is low. In 2017, which saw the most damaging US hurricane season on record, Hurricanes Harvey, Irma, and Maria caused a total of $265 billion in damages, and only 22 percent of those who applied for federal assistance after Harvey, 18 percent after Irma, and 27 percent after Maria were approved. So, like insurance claims, disaster aid likely is not going to provide enough information about flood risk across a range of properties to help prospective buyers make educated decisions about where to live.
What about Floodplain Maps?
Florida legislators chose not to require the disclosure of a key piece of risk information: whether a property is located in the 100-year floodplain, which is the area that FEMA estimates will be inundated in a flood that has a 1 percent chance of occurring in a given year. Studies have found that the disclosure of this information affects buyers’ decisions about where to live and reduces the average sales price of homes in the floodplain.
One problem, though, is that people may rely on the floodplain maps too much. In particular, people tend to interpret the maps as an indication that flood risk falls to zero outside the lines of the maps, which is not the case. Properties outside the 100-year floodplain have incurred substantial damage in many major flood events. When this happens, residents without flood insurance often profess to be caught off guard, because they thought they were not at risk.
The floodplain maps also provide an all-or-nothing perspective on flooding, but the depths of a flood and the amount of damage that a flood causes can vary substantially across properties, even within the 100-year floodplain. People need more granular information to make decisions about flood risk.
What Other Information Could Be Disclosed?
The private market is starting to provide some of that granular information. First Street Technology, Inc., launched a tool in 2020 to offer information about flood risk at the property level. (The tool has been expanded to cover other risks such as wildfire and heat.) Major real estate websites such as Redfin and Realtor.com have incorporated this tool, called Risk Factor, and one preliminary study found that the presence of the tool affects decisions related to searches and purchases. Homebuyers were found to be willing to trade off amenities for lower flood risk, and in areas outside the floodplain, where buyers historically underestimated risk, sales prices decreased relative to listing prices when the tool was present. However, another study, which focuses on the beliefs of existing homeowners and not prospective homebuyers, shows that providing information from Risk Factor to people who were underestimating their current risk does not move the needle on these people’s beliefs, nor on their decision to purchase flood insurance.
Studies have found that people have biased beliefs about disaster risk. In a 2019 study, my coauthor and I found that even people located in the floodplain tend to be overly optimistic about their flood risk relative to their neighbors who also live in the floodplain, and this optimism affects the decision to purchase flood insurance. Studies also have found evidence that people are susceptible to using mental shortcuts which are based on information that comes quickly to mind, known as “availability bias,” and giving greater weight to recent events in making decisions, known as “recency bias.” For example, purchases of flood insurance spike and home prices in floodplains drop after a flood event, but the effects tend to be relatively short lived, which researchers have attributed to these kinds of behavioral biases.
Credit: nevenm / Shutterstock
In defense of homeowners (and everyone else!), flood risk is complicated and can be hard to understand. Take, for example, the 100-year floodplain, noted above as the mapped area that’s likely to be inundated in a flood which has at least a 1 percent chance of occurring each year. But this concept, along with others like return periods, which indicate the expected length of intervals between floods, often are misunderstood. Similarly, the Risk Factor tool estimates flood risk on a scale of 1 to 10, which indicates “minimal” to “extreme” flood risk in an area. But whether people fully understand the meaning of this scale or can discern differences between scores of, say, 4 (“moderate”) and 5 (“major”) is an open question.
Information about the financial consequences of flooding could help clarify flood risk for homeowners and homebuyers; for example, information about expected property damage could be provided instead of, or in addition to, the statistic that a home has a 1 percent chance of flooding in any given year. North Carolina supplies this context in the state’s Flood Risk Information System, which provides the annual probability of flooding for each property in the state, along with the expected damages that different kinds of floods could cause. However, realtors in North Carolina are not officially required to disclose information from the system, so people have to seek out the information for themselves.
Considerations for Policymakers: What is Disclosure Trying to Achieve?
In light of these considerations, what’s the best approach to disclosing flood risk? Disclosing nothing at all allows people to put their heads in the sand about flood risk; requiring more disclosure is mostly a good thing. But policymakers need to think hard about what they are hoping to achieve with new disclosure requirements.
For existing homes, disclosure of flood risk should reduce sales prices in high-risk areas as buyers (hopefully) take into account the added cost of flood insurance or expected damage from future storms. But someone will live in these high-risk homes, nonetheless. Overall exposure to risk likely will remain unchanged, though different people may be exposed. One worry is that lower-income and more socially vulnerable people may move in.
How disclosure will affect who lives where is one of the bigger questions that now needs to be addressed. Others include whether disclosure will affect the location and quality (i.e., the floodproofing) of new homes, whether homeowners will change their decisions to purchase flood insurance in response to disclosure, and how disclosure may affect community investments in flood adaptation and resilience. The jury is still out on these questions. Now that states are rolling out different approaches to disclosure, and the private market is providing data on flood risk at the property level (with FEMA purportedly soon to follow with its Future of Flood Risk Data initiative), more research will be worthwhile about the effects of the different approaches to disclosure on these kinds of broader outcomes.
