Going Underwater? Flood Risk Belief Heterogeneity and Coastal Home Price Dynamics

How do climate risk beliefs affect coastal housing markets? This paper provides theoretical and empirical evidence. First, we build a dynamic housing market model and show that belief heterogeneity can reconcile prior mixed evidence on flood risk capitalization. Second, we implement a door-to-door survey in Rhode Island, finding significant flood risk underestimation and sorting based on risk perceptions and amenity values. Third, we estimate that coastal prices exceed fundamentals by 6%-13% in our benchmark area, with potentially higher overvaluation in other locations. Finally, we quantify both allocative inefficiency and distributional consequences arising from flood risk misperceptions and insurance policy reform.