When the Tide Comes In: Climate Risk, Insurance, and the Housing Market

Abstract

Florida accounts for 35 percent of all National Flood Insurance Program policies, making it the largest flood insurance market in the United States and uniquely exposed to the consequences of federal insurance reform. Despite extensive qualitative concern about the effects of rising climate insurance costs on housing markets, the causal impact of flood insurance repricing on mortgage credit has not been quantitatively established. This thesis exploits the 2021 introduction of Risk Rating 2.0---a FEMA reform that replaced decades of subsidized flood insurance premiums with flood risk sensitive, property-level pricing---to estimate the effect of rising insurance costs on Florida's mortgage market. Using a difference-in-differences design across ZIP codes, results show that areas where a large share of policyholders faced premium increases experienced a significant decline in mortgage originations and applications and a rise in application denial rates. The evidence points to a demand-driven mechanism: higher insurance premiums raise the user cost of homeownership and push marginal borrowers out of the market, rather than reflecting an independent tightening of lender credit supply. Embedding these estimates into a macroeconomic model with borrowing constraints illustrates how localized insurance shocks can reduce aggregate economic output. These findings suggest that climate-induced insurance costs represent an emerging channel through which the Federal Reserve's ability to stabilize the economy through conventional monetary policy may be weakened.