Catastrophic Risk and Behavior of Residential Real Estate Market Participants

Abstract

We gather home sales data for the Cape Fear region of North Carolina and model residential real estate market activity in this coastal area between 1995 and 2000, a period of unprecedented hurricane activity. We extend earlier research revealing an adverse relationship between home values and the series of hurricane strikes beginning in 1996. We construct a framework to consider the changing sentiment of the residential real estate market. Sentiment is the perception of risk by investors in the securities markets, proxied by such measures as trading volume and bid/ask spreads. We hold that residential real estate markets can also be framed by selected measures of sentiment. We employ three sentiment proxies: the spread between listing (asking) and selling prices, average days of a home on the market, and single-family homes sold per month. We find larger spreads and reduced monthly unit sales, but no significant effect upon the marketing time, in the region following the final hurricane landfalls. We believe that these measures of tempered sentiment are likely associated with perceptions of greater catastrophic risk, with the housing market disregarding early landfalls as little more than bad luck, but perhaps viewing later landfalls as evidence of increasing catastrophic risk in the study area.