What's at Stake? Understanding the Role of Home Equity in Flood Insurance Demand

50 Pages Posted: 5 Feb 2021

See all articles by Yanjun Liao

Yanjun Liao

University of Pennsylvania - The Wharton School

Philip Mulder

University of Pennsylvania - Wharton Risk Management and Decision Processes Center; University of Pennsylvania - Business & Public Policy Department

Date Written: January 13, 2021

Abstract

Millions of properties in the U.S. are exposed to increasing threats from natural disasters. Yet, a large majority of at-risk homes are uninsured against the costliest disaster: flooding. Floods cause elevated rates of mortgage delinquency and default that can impact the broader housing finance system. In this paper, we explore the connection between homeowners' stake in their homes and their demand for flood insurance. To isolate the causal effect of home equity on food insurance demand, we study the response of flood insurance take-up to sudden house price changes over the housing boom and bust in the 2000s. We find that flood insurance take-up follows the dynamics of house prices in each market over the boom-bust cycle, with a home price elasticity around 0.33. A series of heterogeneity and robustness checks suggest that the role of mortgage default as implicit insurance is the most plausible mechanism for the positive relationship. We conclude by discussing the implications of our results for the effects of climate change on real estate and financial markets as well as for optimal disaster insurance policy.

Keywords: disaster insurance, home equity, housing booms and busts, mortgage default

JEL Classification: G21, G52, Q54

Suggested Citation

Liao, Yanjun and Mulder, Philip, What's at Stake? Understanding the Role of Home Equity in Flood Insurance Demand (January 13, 2021). Available at SSRN: https://ssrn.com/abstract=3756332 or http://dx.doi.org/10.2139/ssrn.3756332

Yanjun Liao (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
19104 (Fax)

Philip Mulder

University of Pennsylvania - Wharton Risk Management and Decision Processes Center ( email )

3819 Chestnut Street
Suite 130
Philadelphia, PA 19104
United States

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

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