Housing supply, property insurance, and exposure to wildfire risk

Abstract

Over the past decades, about half of new U.S. homes were built in areas exposed to natural hazards. I argue that regulated property-insurance pricing and land-use constraints help explain this pattern. I study San Diego, where wildfire premiums are compressed by regulation and safer locations are tightly constrained. Using detailed spatial data, I estimate a quantitative urban model of household location choice, housing supply, and insurance supply. The results imply substantial underpricing of wildfire risk and large aggregate welfare losses, with important distributional differences. Counterfactuals show that housing-supply reform can substantially reduce the worker burden of cost-based insurance pricing reform.