Do Areas Affected by Flood Disasters Attract Lower-Income and Less Creditworthy Homeowners?

Abstract

In this paper, we show that areas affected by major flood disasters attract less affluent and less creditworthy homebuyers. House prices drop after a flood disaster. The households that purchased homes after a major flood disaster had 2–7% lower annual income and were 8.5% more likely to be seriously delinquent on their mortgages. We find the effects are stronger after repeated flooding incidents. Demand by minority homebuyers does not increase after the disasters. Lenders charge a higher interest rate and are more likely to securitize post-flood mortgages, which is consistent with the idea that lenders infer that the post-flood loans they originate are of lower credit quality ex-ante. Overall our results imply that more affordable house prices in flood-prone areas attract less affluent and more economically vulnerable households.