The Value of Building Codes: Do Homebuyers Value Stricter Construction Requirements in Disaster-Prone Areas?
Dehring, Carolyn A., Regulation
The record-setting 2004 and 2005 hurricane seasons have highlighted the U.S. coastal regions' susceptibility to unpredictable, natural perils. Preliminary estimates of insured losses are $4 billion from Hurricane Rita, $5 billion from Hurricane Wilma, and $35 billion from Hurricane Katrina. Aggregate economic losses from Katrina are estimated to exceed $100 billion.
As more people continue to move to coastal areas, losses resulting from future hurricanes can only be expected to increase. One recent study puts the current value of insured coastal property in hurricane-prone states--those bordering the Atlantic Ocean and the Gulf of Mexico--at $6.76 trillion.
Among the many policy responses to recent natural disasters and their costs have been proposals to tighten land use restrictions and building codes in disaster-prone areas. There is little modern economic research on either the costs of codes or their effectiveness in producing the desired level of safety within high hazard areas. In this article, I examine code changes during the 1980s on Florida's Gulf Coast to determine how land market participants value building codes in high hazard areas, including those associated with the provision of federal flood insurance.
THE VALUE OF BUILDING CODES
Residential building codes have been in use in the United States for over 100 years, with the first model code published by the National Board of Fire Underwriters in 1905. Local governments regulate construction through building codes as an exercise of police power, although the codes themselves may be based on a regional or national model.
Codes can be classified as either prescriptive or performance in nature. Performance codes state a technical objective while prescriptive codes specify a method for achieving an objective. Prescriptive standards offer the advantages of lower enforcement costs and reduced liability for code officials, while performance standards may more readily accommodate technological innovation. Unfortunately, neither type of standard necessarily allows the least-cost method of producing the desired level of safety.
Two theoretical justifications exist for residential construction codes: information asymmetries and externalities. The information asymmetries argument is that homebuyers are unlikely to possess the technical expertise to be able to assess the structural integrity of a housing unit. The externality argument is that codes are required to prevent market participants from developing land in a manner that endangers adjacent property. However, private market mechanisms such as inspection services, home warranties, and liability can address those problems. Citing those mechanisms, opponents of government-administrated building codes assert that under the current system, "innovation is stymied and codes are increasingly rigorous and costly."
PROPERTY VALUES Building codes may impose both technological costs and enforcement costs, yet may provide benefits such as reduced expected mortality and property damage. The value of building codes to land market participants is revealed through land prices as net of the perceived costs and benefits brought about by codes.
Most empirical evidence on building codes and property values finds that codes increase housing costs by not more than 5 percent. With regard to benefits, less is known. One recent study observed that newer properties developed under less stringent building codes sustained greater damage from Hurricane Andrew than pre-1960 structures. On the other hand, in many cases, casual observation following hurricane activity will reveal that elevated houses fair better, holding location constant.
How much do land market participants value safety? The private market's valuation of building codes can be assessed through an examination of vacant land price changes following construction code changes in a high hazard area. …