Delaying Inevitable Real Estate Price Declines at the Coast

Martin D. Smith* and Dylan E. McNamara+ * Nicholas School of the Environment and Department of Economics, Duke University + Department of Physics and Physical Oceanography and Center for Marine Science, UNC Wilmington
Published in Earth & Environment and Economics
Delaying Inevitable Real Estate Price Declines at the Coast
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Marty: I grew up in north San Diego County in what used to be the sleepy beach town of Encinitas, California. The ocean seemed idyllic—beaches and Southern California sunshine— but erosion and storms were always in the background. My great uncle owned a small house on the bluff overlooking Moonlight Beach in the 1970s. It had a great view, but my parents didn’t allow my brother and me to play in the backyard because the bluff was unstable. After my great uncle passed away, the next owners knocked down all but the wall of the house furthest from the bluff and rebuilt. They bought about 25 feet of time for oceanfront living. I also remember when the 1982-83 El Niño sent waves overtopping Highway 101 on the stretch along Cardiff Beach and crashing rock rip rap—meant to protect property from the ocean—into the dining room of a fancy oceanfront restaurant. At my public middle school, one of my science classes was simply called Oceans, and it had a unit on beach erosion (Mr. Schonzeit, thank you for the early inspiration). And, naturally, my high school had a very good surf team. When I go back now, I see continued efforts to stabilize collapsing bluffs, a beach that disappears at high tide in front of that oceanfront restaurant, Highway 101 precariously close to sea level, and ever-increasing property values and wealth.

When I came to Duke in the early 2000s as a new faculty member in environmental economics, I started visiting the North Carolina Outer Banks to vacation with my family while focusing my research on bioeconomics of fisheries. I got a sense of the wide and incredibly flat coastal plain on the U.S. East Coast compared to my West-Coast upbringing and saw that beaches seemed to change so fast that they looked different from one day to the next. Then one of my masters students, Emily Woglom, who is now Executive Vice President of the Ocean Conservancy, suggested that bioeconomic modeling might apply to problems in the coastal zone such as beach erosion and beach nourishment. In bioeconomics, we jointly model the natural capital stock (the fish population) and the human-made capital stock (the fishing fleet). We could do the same with eroding beaches and coastal property. I began working with my colleague in geomorphology, Brad Murray, and Dylan McNamara (a post-doc at the time), to embark on the study of morpho-economics.

Dylan: I was born and raised in the barrier island town of Ocean City, Maryland. The population of Ocean City is about 10,000, but during the summer months 300,000 people jam themselves onto this 10-mile-long strip of sand.  When I was in the 9th grade, Ocean City had its first beach nourishment project.  As a young surfer, I distinctly remember the change to the sandbars that occurred as a result of placing millions of cubic yards of sand onto the beach to remedy the erosion that had shrunken the beach.  The project was a common topic of dinner conversation at my house because my dad was a real estate agent.  He knew the sand was necessary, surfing sandbars be damned, so that tourists could continue to have room to put up their umbrellas, hence maintaining the demand to rent the beachfront condos that he sold.

These conversations and that nourishment project echoed in my head many years later when I was in graduate school. I had stopped studying pure physics by then and was hunting around for ideas related to the ocean to apply mathematical tricks.  I thought, what could be cooler than putting equations to the issue in my hometown and seeing how the future might unfold? The evolution of Ocean City and places like it represented a clear case where the natural environment and economics acted together to shape the future.  So as a PhD student I set course on exploring this new world of morpho-economics.  Following my PhD I continued to do morpho-economic research as a post-doc with Brad Murray and Marty Smith at Duke.

In early work doing morpho-economics, we saw that under some circumstances, the seemingly Sisyphean practice of beach nourishment—dredging sand and rebuilding beaches periodically—actually could make economic sense (Smith et al. 2009).  Then we found empirically that the value of beach width, as reflected in the prices of coastal property, is so high that beach nourishment, which seemed a little crazy, actually did made sense, at least in the time frame of 20-30 years (Gopalakrishnan et al. 2011). Still, over much longer time horizons out to 100 years, predicted sea-level rise suggests that many of these places will be under water, literally. How do we reconcile what we’re seeing now with that inevitable future?

The paradoxes that we witnessed as kids and as interdisciplinary researchers over the last two decades —the rapidly changing physical environment at the coast, the ever-increasing property values, and the heroic efforts to hold back the sea—are the backdrop of our new paper (McNamara, Smith, Williams, et al. 2024). Why do people seem to be getting in the way of climate change? Why isn’t sea-level rise fully reflected in coastal real estate prices?  Why does the coast attract ever-wealthier residents and more investment when the writing is on the wall? We develop a model that helps to answer these questions. Declines in coastal property values due to sea-level rise are delayed by a demographic transition toward higher income owners with high willingness to pay for coastal amenities. U.S. federal tax incentives reinforce this delay and contribute to bidding up coastal property values. Subsidies for beach nourishment also help to keep prices from adjusting to the risks. However, removing subsidies speeds up the demographic transition toward wealthier coastal residents. Policy makers face a tradeoff: remove subsidies that allow prices to reflect risks more accurately and speed up gentrification of the coast or continue to push that rock up the hill for a while longer. 

Acknowledgements

We thank the National Science Foundation (NSF) Grant No. CNH 1715638 for financial support of this work.

References

Gopalakrishnan, S., Smith, M.D., Slott, J.M. and Murray, A.B. The value of disappearing beaches: A hedonic pricing model with endogenous beach width. Journal of Environmental Economics and Management, 61(3), pp.297-310 (2011).

McNamara, D.E., Smith, M.D., Williams, Z. et al. Policy and market forces delay real estate price declines on the US coast. Nat Communications 15, 2209 (2024). https://doi.org/10.1038/s41467-024-46548-6

Smith, M.D., Slott, J.M., McNamara, D. and Murray, A.B. Beach nourishment as a dynamic capital accumulation problem. Journal of Environmental Economics and Management, 58(1), pp.58-71 (2009).

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Resource and Environmental Economics
Humanities and Social Sciences > Economics > Resource and Environmental Economics
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