Housing and Mortgage Markets with Climate Risk: Evidence from Wildfires in California

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.

Keywords: Housing, mortgages, climate risk, household finance, moral hazard.

JEL Classification: G21, G54.