Saturday, May 13, 2006

Learning and Adaptation in a Hurricane Zone

I predict that we will soon see a large number of papers written about adaptation in the face of climate shocks. I read one interesting paper that argued that rural to urban migration will accelerate in LDC nations where farmers are not able to adapt to climate change shocks.

Below, the New York Times suggests that some Florida homebuyers are self protecting by moving inland to reduce their asset's exposure to flooding risk. Note that the end of the article, the article mentions higher insurance premiums for coastal properties. If such premiums' prices vary spatially within Florida as a function of flood risk, then this provides home buyers with an incentive to adapt and move to "higher ground". Higher insurance premiums would also signal to homebuyers the higher probabilistic risk they face from living on the water. It isn't clear whether such homebuyers would be aware of this risk.

A structural economist would ask, what is the marginal cost of adaptation? In this example, it hinges on how much households value living on the water versus a little bit inland.



May 14, 2006 New York Times
National Perspectives
Add 'Elevation' to 'Location, Location'
By FRED A. BERNSTEIN

ACCORDING to Larry Davis, who has sold real estate in the Florida Panhandle for 15 years, "nothing can compete with Seaside," the original New Urbanist community where pastel-colored houses carry million-dollar price tags.

But his new development, Owl's Head, near Freeport, Fla., has something Seaside can't offer: elevation.

"It's a pretty slow rise as you drive up from the beach," Mr. Davis said. "But by the time you get to Owl's Head" — due north of Seaside and about 15 miles inland — "you're at about 100 feet."

By Florida standards, he said, "this is nosebleed country."

And that, to some buyers, could be a blessing. After two seasons in which hurricanes battered the Gulf Coast, destroying houses and much of the beach itself, some customers may like the idea of living inland, where they are protected from storm surges.

It's too early to say if repeated hurricane threats will change the dynamics of Florida real estate, in which beachfront property has always been the holy grail. But some developers, including Mr. Davis's employers, clearly believe that higher ground can be a selling point.

(In fact, after Owl's Head introduced the slogan "Florida's Coastal Inland Heights," the Walton County Chamber of Commerce decided to use it, too. On May 24, the chamber will be the host for a kickoff event complete with an "oxygen bar" for people who aren't accustomed to the altitude, said Dawn Moliterno, the chamber's president.)

For his part, Mr. Davis — whose half brother, Robert, conceived and developed Seaside — carries an altimeter when he walks the Owl's Head property with customers. The altimeter, which resembles a watch and cost $150, "reinforces the idea that we're not at sea level anymore," Mr. Davis said, adding that his marketing team suggested he buy the device.

It must be working. Mr. Davis said that 60 lots have already been sold at Owl's Head for $80,000 to $285,000.

That's a pittance compared with prices on the coast. At Seaside and Rosemary Beach, another New Urbanist community on the Gulf of Mexico, where owners include Karl Rove, water-view lots are listed for around $2 million.

Yet brokers in the area say the market along the coast has slowed nearly to a halt since Hurricane Dennis last summer. "Nothing's selling," said Stephen Robbins, an agent for Seagrove on the Beach Realty in Seagrove Beach.

"Wealthy buyers will continue to want the ultimate, which means living on the water," he said.

But otherwise, he said, "I can understand people who want a buffer."

For one thing, people who live on the coast have to evacuate whenever a big storm seems to be headed their way. "I've had to leave my house 10 times in the last 10 years," Mr. Robbins said. "Sometimes, I've had tears in my eyes."

David S. Nolan, a professor of meteorology at the University of Miami, said, "Certainly, at 110 feet they're protected from storm surges."

But he added that houses at Owl's Head could still suffer hurricane damage, particularly because much of what separates them from the Gulf of Mexico is a bay. In the face of a powerful storm, Dr. Nolan said, Owl's Head residents "might still want to leave."

In 2004, Forrest A. Westin, then a graduate student at M.I.T., studied real estate in four Florida counties and determined that from 1977 to 2002, waterfront property, already much more expensive than inland property, also gave investors a greater return.

Reached in Berkeley, Calif., where he is now a developer, Mr. Westin said he didn't know if that relationship was changing, but he noted that "there were obviously a number of hurricanes in that period of 25 years, and if you held onto your house long enough, you came out ahead of someone who was inland."

Dean H. Gatzlaff, a professor of business administration at Florida State University in Tallahassee, believes that at least until 2004, hurricane activity was factored into prices of waterfront property. However, he wrote in an e-mail message, the higher level of hurricane activity in 2004 and 2005, to the degree it surprised buyers, "would not have been priced."

"If the level of hurricane activity is again surprisingly high in 2006," he wrote, "we'll continue to see a dampening of prices."

Mr. Davis, the Owl's Head broker, lives about 150 yards from the gulf, in Inlet Beach. He moved to Walton County 18 years ago and took a job working for his half-brother, Robert, in Seaside's rental program. Later, he created Davis Properties, which sells real estate throughout the Panhandle.

Last year, he was brought in by three Atlanta businessmen who had purchased the land for Owl's Head. Jeff Tucker, who described himself as the "primary development partner," said they paid about $22,000 an acre.

The developers are selling "peace of mind," Mr. Tucker said, but there are other advantages to being inland. Along the coast, the need for structural reinforcements and hurricane-proof windows can add thousands of dollars to the cost of a new house.

Then, too, the price of insurance along the coast is high and getting higher, Mr. Tucker said. Several brokers in the area said that insuring a house along the gulf can cost at least twice as much as insuring a similar house inland, though they declined to give specific figures because, they said, every situation is different.

Two years ago, Mr. Tucker and his partners hired Duany Plater-Zyberk & Company, the Miami architecture firm that designed Seaside and Rosemary Beach, to lay out Owl's Head, one of the few New Urbanist towns to incorporate a golf course.

Such pairings are rare because the usual goal of developers — to use the course as a bucolic setting for as many lots as possible — is inconsistent with the New Urbanist goal of grouping houses together in a tight block.

But the Owl's Head course, which carries the Arnold Palmer brand name, occupies a discrete part of town and is approachable from public streets.

Marina Khoury, an architect with Duany Plater-Zyberk, said, "We went to great lengths not to privatize the golf course, so that it becomes an amenity that's available to everybody."

Thad Layton, the landscape architect with the Palmer Course Design Company in Ponte Vedra Beach, Fla., who is designing the Owl's Head course, said the hilly topography makes it more interesting than many other courses in the state. "Some of the holes in the back nine are going to have quite a lot of elevation change," he said.

But "quite a lot of elevation change" is relative. The highest point in Florida — Britton Hill in Lakewood (also in Walton County) — is a mere 345 feet.

Of the highest points in the 50 states, it is the lowest.

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