Measuring Heterogeneous Price Effects for Home Acquisition Programs in At‐Risk Regions

Abstract

Any entity offering flood insurance, whether it is private or government‐administered such as the National Flood Insurance Program (NFIP), faces the challenge of solvency. This is especially true for the NFIP, where homeowner affordability criteria limit the opportunity to charge fully risk‐based premiums. One solution is to remove the highest flood risk properties from the insurer's book of business. Acquisition (buyout) of flood‐prone structures is a potentially permanent solution that eliminates the highest risk properties while providing homeowners with financial assistance to relocate in a less risky location. To encourage participation, homeowners are offered a preflood fair market value of their damaged (or at risk of damage) structures. Although many factors have been shown to affect a homeowner's decision to accept an acquisition offer, very little research has been devoted to the influence of price or monetary incentive offered on homeowners' willingness to participate in acquisition programs. We estimate a pooled probit model and employ a bootstrap methodology to determine the effects of hypothetical home price offers on homeowners' acquisition decisions. We do so while controlling for environmental factors, property characteristics, and homeowner sociodemographic characteristics. Results show that price indeed has a positive effect on likelihood of accepting an acquisition contract. Furthermore, estimated homeowner supply curves differ significantly based on the damage status of the acquisition offer, as well as homeowner and property characteristics.

Homeowner Preference for Household-level Flood Mitigation in US: Analysis of a Discrete Choice Experiment

“…After floods in 1997, approximately 800 properties were bought out in Grand Forks, North Dakota. A year later, San Antonio, Texas, acquired 400 properties to reduce future flood risk, and after Hurricanes Fran and Floyd in 1999, about 1,150 properties were bought in Greenville and Kinston, North Carolina (De Vries and Fraser, 2012;Frimpong et al, 2019). In addition to eliminating future flood risk to properties and lives, buyouts have several other advantages.…”

“…Barnhizer (2003) mentions that for every $1 the government invests in the buyout, homeowners who participate save $2 in future flood insurance premia by moving to lower-risk areas. By making offers based on predamage assessments of the home, acquisition programs provide an opportunity for homeowners to protect themselves against decreased home values in the wake of a flood event (Frimpong et al, 2019;Greer and Binder, 2017). Federal and local governments, on the other hand, could potentially save on future insurance payouts and other flood-related expenditures when a flood-prone area is cleared of structures (Barnhizer, 2003).…”

“…Yet, the program is challenged with solvency issues partly due to program design. 1 The program has accumulated debt exceeding $20 billion (Congressional Research Service, 2019), and efforts to achieve solvency through risk-based premium rate structures have met public resistance, rolling back proposed rates increases (Frimpong et al, 2019). Consequently, this has raised concerns about program performance and sustainability.…”

“…Within the flood risk mitigation literature, the relatively few studies examining individuals' decision to participate in buyouts have focused on the effects of demographic and geospatial factors (Fraser et al, 2003;Fraser, Doyle, and Young, 2006;Fraser, De Vries, and Young, 2006;Kick et al, 2011;De Vries and Fraser, 2012;Zavar, Hagelman, and Rugeley, 2012;Bukvic et al, 2015;Robinson et al, 2018;Frimpong et al, 2019). Frimpong et al (2019) examined the effect of offered price on homeowners' decision to participate in buyouts using a contingent valuation survey of 123 homeowners in Eastern North Carolina.…”

“…Within the flood risk mitigation literature, the relatively few studies examining individuals' decision to participate in buyouts have focused on the effects of demographic and geospatial factors (Fraser et al, 2003;Fraser, Doyle, and Young, 2006;Fraser, De Vries, and Young, 2006;Kick et al, 2011;De Vries and Fraser, 2012;Zavar, Hagelman, and Rugeley, 2012;Bukvic et al, 2015;Robinson et al, 2018;Frimpong et al, 2019). Frimpong et al (2019) examined the effect of offered price on homeowners' decision to participate in buyouts using a contingent valuation survey of 123 homeowners in Eastern North Carolina. Other studies have also focused on the effect of demographic and geospatial factors on individuals' decisions to buy flood insurance (Baumann and Sims, 1978;Browne and Hoyt, 2000;Michel-Kerjan and Kousky, 2010;Kousky, 2010;Gallagher, 2014;Kriesel and Landry, 2004;Landry and Jahan-Parvar, 2011;Petrolia, Landry, and Coble, 2013) or elevate their homes (Botzen, Aerts, and van den Bergh, 2012).…”