Single-family homes in U.S. flood plains are overvalued by a total of $43.8 billion, new research shows, highlighting the unsustainability of real estate markets in the face of escalating climate change.

An estimated 3.8 million single-family homes are located in flood plains, meaning the average flood plain home is overvalued by more than $11,500, according to an April 27 paper in the Proceedings of the National Academy of Sciences.

"The overvaluation we find is really concerning, especially given the increases in climate risk that are coming our way," said lead author Miyuki Hino, an environmental social scientist at the University of North Carolina at Chapel Hill. 

The widespread overvaluation could represent a ticking time bomb for the millions of Americans whose assets are tied up in flood zone properties, which are concentrated, but not exclusively located, in coastal states. As sea levels rise, natural disasters worsen and flood insurance rates rise, these properties' values could plummet. 

Hino and her co-author, Marshall Burke of Stanford University, found that a single-family home being located in a flood plain does decrease its value by a little bit — but to a far lesser degree than it should. 

"Lots of properties in many states are only affected by the flood plain by about 1% or 2% — and in our estimates they should be affected by 5% or 6% or 7%," Hino said. 

The disparity reflects insufficient home buyer awareness of flood risk, the researchers said. A few states, such as Louisiana, have relatively strict flood risk laws, requiring sellers to disclose whether a house is in a flood zone, whether the current owners have flood insurance and whether the house has flooded in the past. Other states, such as Virginia, have much less strict disclosure laws. 

"In states where sellers have to disclose a lot of information about flood risk to buyers, we see stronger evidence that there's an effect [on home values]," said Hino.

The researchers also found that corporate buyers seem to be much more aware of flood risk than individuals. Companies such as Blackstone that buy and then rent out single-family homes en masse apply a roughly 7% discount to flood plain properties, compared to a discount of just 1% to 2% for individuals who rent out homes, the researchers found. 

"When businesses buy flood plain homes, they discount them by a lot," said Hino, who conducted the research as part of a Ph.D. program at Stanford's School of Earth, Energy and Environmental Sciences. 

In order to measure the so-called "flood zone discount," Hino and Burke examined changes in property values after federal flood plain maps were updated, causing homes that were previously outside the flood zone to be inside it. Comparing individual houses to themselves over time, rather than comparing houses within flood zones to houses outside them, allowed the researchers to make sure they were measuring flood risk rather than other factors, including public schools or transit options, Hino said. 

The study was made possible by decades of data from the federal government's National Flood Insurance Program maps, which delineate what properties are located in "100-year flood plains."

But despite the valuable data, Hino said the government's messaging around "100-year flood plains" undersells risk.

"It's known as the 100-year flood plain because it has a 1 in 100 chance of flooding each year," she said. "That makes people think that if it flooded last year it's not going to flood for another 100 years." 

For example, Houston recently suffered two so-called "1,000-year floods" over a period of just 25 months. 

Hino added that the idea of flood plains in general can give people living just outside the areas a false sense of security.

"If you live very close to the flood plain but just outside, there's no form that's going to tell you that," she said. 

A key reform that could help the real estate market better reflect flood risk would be to require sellers to make disclosures earlier. Currently, most states that mandate flood disclosures only require them at closing, Hino said, making flood risk less likely to affect buyers' decisions. 

"The information exchange is happening, but it's happening too late," she said, adding that she recommends that states require disclosures much earlier in the process. 

Hino said further research should focus on the best mechanisms to communicate flood risk to home buyers, as well as what factors besides flood zoning can influence buyers. 

"Trying to understand local knowledge, local experience and what effect that has on buying decisions in prices is one area that is tricky but I would really like to investigate further," she said. 

The paper, "The effect of information about climate risk on property values," published April 27 in the Proceedings of the National Academy of Sciences, was authored by Miyuki Hino, University of North Carolina at Chapel Hill and Stanford University; and Marshall Burke, Stanford University.