Does Climate Change Affect Real Estate Prices? Only If You Believe in it

Review of Financial Studies, Forthcoming
Coauthor: Markus Baldauf and Lorenzo Garlappi

Scientists agree that climate change will have a significant impact on U.S. coastal regions, yet beliefs among the general population on its occurrence and effects are divided. In this paper we study, both theoretically and empirically, whether real estate valuations reflect these differences in beliefs. We develop a model of housing choice in which agents derive utility from ownership in a neighborhood of similar agents. In equilibrium, agents endogenously sort by belief into geographically distinct neighborhoods. In our empirical analysis, we construct a comprehensive dataset on home transaction prices in the U.S. that maps individual homes to future inundation projections and survey data on beliefs of U.S. population about climate change. Our analysis shows that houses projected to be underwater in "believer" neighborhoods tend to sell at a discount compared to houses in "denier'' neighborhoods. This result is robust to a host of empirical specifications that account for variation in climate-change awareness over time, salience of flood risk, and house supply effects. Our results suggest that heterogeneity in beliefs about long-run climate change risks are reflected in U.S. real estate market prices.