Hurricane Sandy made it painfully clear how fragile a city composed mostly of low-lying islands can be, and that reality has put New Yorkers in an uncharacteristically insecure mood. The New York Times expressed these anxieties this weekend in an article titled “Is This the End?” which pondered the mortality of America’s largest metropolis. Of course all good things — even New York City — must come to an end at some point. But in the meantime, what will a world filled with higher sea levels and more extreme weather mean for New York City and other coastal communities?
One logical result would be cheaper real estate prices. Even with the benefit of government-subsidized, below-market flood insurance, who wants to deal with their first floor getting destroyed by flood waters every five years? This is what Sasha Frere-Jones of The New Yorker feared in the immediate aftermath of the storm. He postulated that high-elevation property will soon become a hot commodity in New York City:
“Real-estate agents won’t have as much luck selling river views, and may end up appealing to fear, that reliable unit-shifter. On Craiglist, next to pitches like “Granite Kitchen, X-bRICK, hardwood floors,” expect to see “elevation 80 and above!!!”
In the aftermath of Sandy, this reaction appears utterly rational. Anyone shopping for a home should consult National Flood Insurance Program maps to understand what the estimated risk of flooding is for their property, protect themselves with flood insurance, and possibly even decide against buying a home at all if it’s located in a flood-prone area. Unfortunately, however, humans don’t always act rationally — and according to a forthcoming paper by economists Okmyung Bin and Craig E. Landry, they also tend to have extremely short memories when it comes to natural disasters.
Bin and Landry studied real estate prices in Pitt County, North Carolina before and in the aftermath of Hurricanes Fran and Floyd in 1996 and 1999, respectively. According to their research, prior to Hurricane Fran there was no differential in home prices between those in flood-prone areas and those outside — as there hadn’t been a significant flooding event in Pitt County since the 1950s. Immediately after Hurricane Fran, however, home prices inside the flood zones predictably fell in price, selling for 5% less on average than homes outside flood zones. After the particularly ruinous Hurricane Floyd, this price difference became an even-more-extreme 8%.
But what surprised Bin and Landry was that the differential evaporated completely by 2005, a mere six years after Floyd devastated much of Pitt County. In other words, it doesn’t take long for prospective home buyers to forget the dangers of living in flood-prone areas. According to Landry, “We were really surprised by this result. We expected to see a decay, but not to see it disappear completely.”
To explain their confounding results, Bin and Landry turned to a concept in behavioral economics called the “availability heuristic.” Basically, what this theory argues is that human beings are less able to judge the probability of an event occurring which they have not recently experienced themselves. A person who hasn’t lived through a flood will downplay the probability of his house getting flooded, and the same goes for someone who hasn’t experienced a flood very recently.
Frere-Jones reaction to the hurricane (seek high ground!) may seem completely rational, but he may be underestimating just how short our memories can be. The study suggests that once New Yorkers are a few years removed from the devastation of Hurricane Sandy, they’ll come flocking back to those river views and trendy-but-low-lying Brooklyn neighborhoods.
Of course, the x factor here is how much climate change will increase the frequency of Sandy-like events. If the availability heuristic does indeed explain Bin and Landry’s findings, then we would see a tipping point when extreme weather events become so frequent that we don’t have time to forget them in between, driving down real estate prices for good. Even our short memories will keep us away from the water if a hurricane of Sandy’s magnitude becomes a yearly occurrence.