Disclosing Wildfire Risks in Home Sales

Damages from wildfires in the United States are on the rise. Of the top 10 costliest wildfires in terms of insured losses, eight have occurred since 2017. One reason for the rising costs of wildfires is the growing number of people and property in harm’s way. The wildland-urban interface, where the built environment meets or intermingles with areas of wildland vegetation—including areas with high potential for fire hazards—is by some accounts the fastest-growing land area in the United States.

Whether people fully understand the risk of wildfire when choosing to live in the wildland-urban interface is an open question. If they do understand, housing prices should reflect that risk; houses in locations where the risk of wildfire is higher should sell for less, all else being equal. However, these houses may not sell for less if homebuyers don’t fully understand the risk of wildfire. This potential gap in understanding offers a strong argument for the disclosure of wildfire risk to homebuyers. Disclosure could enable homebuyers to make more informed decisions when purchasing a house.

Regulating the Disclosure of Wildfire Risk

California is one of only two states (along with Oregon) that require a house seller to disclose the risk of wildfire. In California, disclosure depends on the hazard level (moderate, high, or very high) that is assigned to a house by the California Department of Forestry and Fire Protection and the local, state, or federal jurisdiction responsible for preventing and suppressing fires. In so-called State Responsibility Areas, the disclosure of wildfire risk is required if a house’s hazard level is moderate or higher. In so-called Local Responsibility Areas, disclosure is required only if a house’s hazard level is very high. A large area of very high hazard exists in the northern part of California that is east and north of the Sacramento Valley, but areas of very high hazard exist in other parts of the state, as well (Figure 1).

In a recent working paper, we set out to analyze how California’s disclosure requirements affect housing prices. We used data on property sales for single-family homes from January 2015 to March 2022; we obtained these data through the Zillow Transaction and Assessment Database.

Because wildfire risk is highly correlated with amenities that contribute to the value of a house, such as scenic views and access to outdoor recreation areas, separately identifying the market effects of amenities from the effects of risk can be difficult. To address this challenge, we compared sales data from both sides of boundaries between areas that have different disclosure requirements. Though these requirements can change abruptly at a boundary, the amenities that correlate with the risk of wildfire should vary continuously. We compared the sale prices of houses that are close to a boundary, and in the same hazard level, but which have different disclosure requirements.

In our analysis, we also accounted for property characteristics (such as the size of a house) and neighborhood characteristics (such as the distance to protected public lands). Through this approach, we isolated the effects of wildfire risk disclosure on the sale prices of otherwise similar properties.

Our results suggest that disclosure matters to homebuyers and that, without disclosure, homebuyers do not fully incorporate the risk of wildfire into their decision to purchase a house. The results also lend credence to efforts to increase disclosure about all kinds of natural hazards. Even though the Federal Emergency Management Agency has mapped flood risk for a long time, the disclosure of flood risk, including maps of flood risk and whether a home has flooded previously, varies widely across states.

First Street Foundation recently has developed risk factors for both flood and fire at the level of individual properties across the United States, and this information has been incorporated into listings that are managed by the real estate websites Redfin and Realtor.com. Whether these risk factors will be a valuable tool for circulating information about risk remains to be seen. Risk information that is communicated through listings also may not be as salient as an official disclosure—and, without disclosure requirements, realtors may opt to withhold risk information from prospective buyers.