The old view: Markets will smoothly price climate risk
For years, the conventional wisdom among economists and real estate professionals was that housing markets are efficient: as climate risks become more apparent, property prices would gradually adjust downward to reflect the true cost of future floods, fires, and storms. This belief rested on the assumption that homebuyers, lenders, and insurers all have access to good risk information and act rationally on it. The new research overturns that assumption in several key ways.
The most striking evidence comes from a 2023 study in Nature Climate Change, which found that US residential properties exposed to flood risk are overvalued by $121–$237 billion [4]. That is not a small mispricing — it is a systemic gap between what homes are actually worth given their flood exposure and what they sell for. The study shows that this overvaluation is concentrated in counties with no flood risk disclosure laws and where residents express less concern about climate change [4]. In other words, markets are not efficiently pricing risk; they are ignoring it wherever they can.
What actually happens: Prices drop only after a disaster — and only close by
The new picture is far more localized and event-driven. A 2024 study of major wildfires in California from 2016 to 2021 found that the overall effect on home values inside fire-touched neighborhoods was not statistically significant — meaning a home that actually burned did not lose value on average [1]. However, homes in nearby neighborhoods within five miles of the fire perimeter saw a 2.2% price drop, and the drop was larger the closer the home was to the fire, the more frequently the area burned, and the larger the fire [1]. This tells us that buyers react to the visible, recent memory of a disaster, not to the underlying long-term risk.
A 2025 study of the catastrophic 2021 Western European flood in Germany tells a similar story. Flood-prone properties only lost value if they were close to the actual flood event or if the local population already had strong beliefs in climate change [2]. In other flood risk zones — areas that are equally at risk on paper but did not flood recently — there was no statistically significant price effect [2]. The authors warn that this uneven adjustment may lead to suboptimal capital allocation, meaning money keeps flowing into risky areas simply because the last disaster happened somewhere else.
The biggest risk is not a crash, but a slow-motion overvaluation crisis
If markets only adjust after a disaster and only in the immediate vicinity, then the vast majority of at-risk properties remain overpriced. The $121–$237 billion in overvalued US flood-risk properties is not evenly spread: it is concentrated in coastal counties without disclosure laws, and low-income households are most vulnerable to losing home equity when prices eventually correct [4]. Municipalities that rely heavily on property taxes could face budget shortfalls if a wave of price corrections hits [4].
A 2022 framework paper on commercial real estate adds that market valuations cannot properly incorporate climate risk without clear evidence that buyers and sellers are already pricing it in [3]. The authors note that while some recent studies find pricing signals, the evidence is still thin for commercial properties, and valuers can only advise clients on potential future impacts, not adjust current market values [3]. This means the overvaluation problem is not limited to homes — it likely extends to office buildings, warehouses, and retail properties, where the data is even scarcer.
Finally, a 2021 study on discount rates — the rate used to calculate the present value of future costs — found that housing markets imply a long-run discount rate of about 2.6% for payoffs beyond 100 years [5]. This matters because if investors use too high a discount rate, they undervalue future climate damages and overvalue risky assets today. The study suggests that the appropriate discount rate for climate-hedging investments is actually lower, meaning the true cost of future climate damage is higher than current prices reflect [5].
About These Sources
This answer is built on 5 peer-reviewed studies — published from 2021 to 2025, 2 from 2024 or later, 4 in Q1 journals, collectively cited 528 times — selected as the most relevant from 5 studies that passed quality screening, drawn from 55 papers retrieved from a database of over 500 million.
Sources used in this answer
Climate change and real estate markets: An empirical study of the impacts of wildfires on home values in California
Using a quasi-experimental design with a 12-year panel dataset of California neighborhoods, this study found that wildfires caused no significant price drop inside burned neighborhoods, but a 2.2% average decline in nearby neighborhoods within five miles, with larger drops closer to the fire and in areas that burned more frequently.
Adjusting to the New Normal: River Flood Risk and the Real Estate Market
Exploiting the 2021 Western European flood in Germany, this study found that flood-prone properties only lost value if they were near the actual flood or in areas with strong climate change beliefs; other flood risk zones showed no price effect, implying uneven and potentially inefficient market adjustment.
Climate risks and their implications for commercial property valuations
This literature-based framework identifies the channels through which physical climate risks affect commercial real estate cash flows and pricing, concluding that market valuations cannot incorporate climate risk without clear evidence it is already priced by market participants.
Unpriced climate risk and the potential consequences of overvaluation in US housing markets
Comparing empirical prices to economically efficient prices, this study found US residential properties exposed to flood risk are overvalued by $121–$237 billion, concentrated in coastal counties without disclosure laws and with lower climate concern, putting low-income households and property-tax-dependent municipalities at risk.
Climate Change and Long-Run Discount Rates: Evidence from Real Estate
Using housing market data, this study found the term structure of discount rates for real estate is downward sloping, reaching 2.6% for payoffs beyond 100 years, implying that the appropriate discount rate for climate abatement investments is lower than commonly used, meaning future climate damages are undervalued.