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

40 Pages Posted: 23 Jan 2020 Last revised: 3 Apr 2024

See all articles by Paulo Issler

Paulo Issler

University of California, Berkeley - Haas School of Business

Richard Stanton

University of California, Berkeley - Haas School of Business

Carles Vergara-Alert

University of Navarra, IESE Business School

Nancy Wallace

University of California, Berkeley - Real Estate Group

Date Written: April 2, 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.

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

JEL Classification: G21, G54.

Suggested Citation

Issler, Paulo and Stanton, Richard H. and Vergara-Alert, Carles and Wallace, Nancy E., Housing and Mortgage Markets with Climate Risk: Evidence from Wildfires in California (April 2, 2024). Available at SSRN: https://ssrn.com/abstract=3511843 or http://dx.doi.org/10.2139/ssrn.3511843

Paulo Issler

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Richard H. Stanton

University of California, Berkeley - Haas School of Business ( email )

Haas School of Business
545 Student Services Building #1900
Berkeley, CA 94720-1900
United States
(510) 642-7382 (Phone)
(510) 643-1412 (Fax)

Carles Vergara-Alert (Contact Author)

University of Navarra, IESE Business School ( email )

Nancy E. Wallace

University of California, Berkeley - Real Estate Group ( email )

Berkeley, CA 94720-1900
United States

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