BEPP Set 2: Real Estate, Munis, and Physical Risk

Physical risk (chronic vs. acute)

Chronic: slow changes like sea level rise and temperature.

Acute: extreme events like hurricanes, floods, and wildfires.

Transition risk

Risk from moving to a low-carbon economy: new regulation, litigation, technology shifts, investor and customer pressure.

Which firms face the most physical risk?

Firms whose cash flows depend on physical assets, locations, or weather (e.g., agriculture, real estate), more than service firms like marketing agencies.

Hedonic regression

Price = α + β(house characteristics) + γ(location characteristics) + δ(climate risk) + ε; estimates how much buyers value each feature, including climate risk.

Expected sign on climate risk in a hedonic regression

Negative; higher flood or fire risk should lower home prices.

Omitted variable bias

Leaving out a variable correlated with both price and climate risk biases the climate coefficient; e.g., risky coastal homes also have ocean views, which hides the risk discount..

Fixing omitted variable bias

Add more house and neighborhood controls so the climate coefficient isn't picking up other features.

Direction of omitted variable bias (logic)

If risky homes are also worse in some omitted way, the risk coefficient absorbs that too and overstates the discount; if they're better in an omitted way, it understates it.

Housing market evidence on sea level rise

In exposed areas, sales volume dropped first (around 2013) and prices followed later; effects were largest where people are more worried about climate change.

Climate beliefs and home prices

Areas with more climate concern saw bigger price and volume declines for exposed homes, so beliefs matter for pricing, not just risk.

Why lenders are less exposed to housing climate risk

Flood insurance and securitization (selling mortgages off) shift the risk.

Municipal bonds and climate risk

Local bonds are backed by property taxes; since about 2012, investors demand higher yields from districts exposed to sea level rise.