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Spotlight on Economics: Flood Hazards Impact on House Prices in the Fargo-Moorhead Area

Actual flood events can change a homebuyer's perceptions about flood risk, thereby possibly discounting the home's value.

By Lei Zhang, Assistant Professor NDSU Agribusiness and Applied Economics Department

Located in the Red River basin, the Fargo-Moorhead (Minn.) area always has been threatened by flooding from the Red River.

The unique topography of the Red River Basin is the major culprit of the flooding. The river runs from south to north, drains from western Minnesota and eastern North Dakota and discharges into Lake Winnipeg in Canada.

The valley portion of the basin has a slope of 1 to 2 feet per mile, and the basin’s margin has an elevation drop of up to 950 feet. This topography easily can cause flooding.

In spring, the Red River thaws and runs steadily northward through the valley. The southern end of the Red River Basin can be melting, while the northern end and Lake Winnipeg still may be frozen. Thus, runoff from the south can cause localized flooding.

The increase in global warming, climate change and the reduction in flood storage capacity also increased the frequency and severity of flooding in the past two decades. In 2009, flooding on the Red River, caused mainly by spring snowmelt and exacerbated by additional rain and snowstorms, threatened the Fargo-Moorhead area. The river crested at a high water record of 40.84 feet on March 28, 2009.

According to the Federal Emergency Management Agency (FEMA), the 100-year flood plain is an area where a flood event has a 1 percent probability of occurring in any given year. A 500-year flood plain is an area where a flood event has a 0.2 percent probability of occurring in any given year.

Many researchers have investigated the impact of flood hazards on house prices. The results show that houses located within a 100-year flood plain usually sell at a discount varying from 4 to 12 percent, while sale prices of houses located within a 500-year flood plain are not affected by the flood hazards. The price discount may be caused by the requirement of flood insurance for houses located within the 100-year flood plain.

My recent research used house sale data from 2007 to 2013 in the Fargo-Moorhead metropolitan statistical area to estimate the effect of flood hazards on residential property values.

My research indicates that the market value of a house located within a flood plain is lower than an otherwise similar house located outside the flood plain. Moreover, actual flood events such as the 2009 flood do temporarily change a homebuyer’s perception about flood risk and increase the price differential.

In 1968, Congress passed the National Flood Insurance Program (NFIP), which provides insurance protection for property owners in participating communities. Properties located in the 100-year flood plain that carry a federally backed mortgage are required to obtain flood insurance.

NFIP limits the coverage for building property up to $250,000 and personal property (contents) up to $100,000. Ideally, the price discount on house sales located within a 100-year flood plain reflects the home owner’s willingness to pay to reduce the cost of flooding, thus should be equivalent to capitalized flood insurance premiums.

However, in practice, the price discount may be different from the capitalized flood insurance premiums, and the price discount may change according to the homebuyer’s perception about flood risk.

What can we learn from the study? If a house is located in a 100-year flood plain, in order for the homeowner to maximize his/her earnings, it is better not to sell the home after a flood event.


NDSU Agriculture Communication - Oct. 13, 2016

Source:Lei Zhang, 701-231-9797, lei.zhang.3@ndsu.edu
Editor:Kelli Armbruster, 701-231-6136, kelli.armbruster@ndsu.edu
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