David Wilson | Environmental Economics

Housing markets are spatially segmented, yet the empirical literature on climate risk capitalization typically treats flood exposure as a uniform attribute priced consistently across geography. This paper argues that the relevant unit of comparison for a homebuyer is not the national housing market but a local search set, and that estimated flood risk discounts depend critically on the spatial scale of identification. Using a hedonic framework applied to over 35 million residential transactions, I show that the estimated discount for flood exposure declines from 4.9% when identified using national variation to 1.7% within counties and just 0.9% within ZIP codes. This pattern indicates that most of the apparent capitalization of flood risk reflects differences across spatially segmented submarkets rather than marginal pricing within them. A small within-market gradient, however, may reflect either genuine indifference to parcel-level risk or incomplete information. To distinguish between these explanations, I exploit South Carolina’s 2013 statewide flood-disclosure reform as a natural experiment that exogenously expanded buyers’ information sets. Using a difference-in-differences design, I find that the mandate reduced prices for properties in Special Flood Hazard Areas by approximately 5.4% relative to non-SFHA properties in the same county and month. A triple-difference specification further shows that disclosure steepened the price–risk gradient within the floodplain, with the capitalization of a one standard deviation increase in flood risk falling by an additional 4.1% following the mandate. Together, these findings indicate that pre-mandate prices reflected an information asymmetry within spatially segmented markets, and that targeted disclosure policies can meaningfully improve the pricing of climate risk in residential markets.