Home Financing Responses to Wildfire Risk Information and Insurance Availability

• In Event: Housing policy levers for equitable climate adaptation

Abstract

Wildfire risk is increasingly shaping housing markets in the western United States, particularly through its interaction with the market for homeowners insurance. We study how information about wildfire risk affects homebuyer behavior, focusing on a 2021 California reform that requires sellers to disclose parcel-level wildfire hazard and potential insurance constraints for properties located in designated fire hazard zones. 

We leverage the spatial discontinuity in disclosure requirements at fire hazard zone boundaries and implement a boundary difference-in-differences design comparing transactions just inside and outside the disclosure zone before and after the policy. Because underlying wildfire risk and insurance availability vary smoothly across the boundary, this approach isolates the causal effect of risk disclosure as an informational shock. 

We find that disclosure reduces housing prices by approximately 4 percent at the boundary of designated fire hazard zones, consistent with buyers capitalizing newly salient wildfire risk and insurance frictions into prices. At the same time, disclosure substantially reshapes both financing and buyer composition in high-risk areas. Following the policy, the share of all-cash purchases increases by 14 percentage points, while owner-occupancy declines by 13 percentage points. These effects are strongest in state-managed wildfire areas, for older homes subject to higher insurance costs, and in locations with greater reliance on California’s insurer of last resort. 

We interpret these results as evidence that disclosure interacts with insurance market frictions in ways that reshape both market access and risk-bearing. Mortgage-financed buyers, who must secure insurance at closing, are more likely to exit high-risk markets when faced with information about insurance constraints, while cash buyers can proceed without binding coverage requirements. As a result, disclosure not only affects prices but also shifts the composition of buyers toward households with greater liquidity and a higher tolerance for uninsured risk. Taken together, the price and compositional responses suggest a reallocation of climate risk away from insurers and lenders and onto individual households. 

This reallocation has important policy implications. While disclosure improves information and may enhance market efficiency, it can also expand underinsurance in high-risk areas by facilitating transactions among buyers who are not required to obtain coverage. This raises concerns about household financial vulnerability and the potential for increased reliance on post-disaster public assistance. Our findings suggest that disclosure policies alone may be insufficient in the presence of constrained insurance markets and highlight the importance of pairing risk information with policies that address insurance availability, coverage take-up, and consumer protection in climate-exposed housing markets.

Author

• Sarah Bass, University of Georgia
  Presenting Author