Applied Micro Lunch Seminar: Will Heo, University of California, Santa Barbara

Speaker

Will Heo, University of California, Santa Barbara

Title: "Learning from Floods: The Behavioral Dynamics of Housing Market Adjustment"

Abstract: Natural disasters provide a sharp test of how efficiently housing markets incorporate new information about risk. Using nearly two decades of transaction-level data from Seoul, South Korea, I show that floods trigger gradual and persistent rather than immediate and temporary adjustment in housing prices. Lease prices decline within two years, while sales prices fall only after five years. Transaction volumes contract first in both markets. To explain why price declines follow a few years after transaction volumes contract, I present evidence of reference-dependent behavior: homeowners anchor to previous nominal purchase prices and delay realizing losses. Flood-affected properties also take substantially longer to be resold. A dynamic model with social interactions through gradual belief updating can also replicate the gradual price decline. The results imply that climate shocks generate persistent and uneven capitalization across housing segments, suggesting that risk disclosure, broad insurance coverage, and high nominal price growth can help housing markets incorporate disaster risk more quickly.