Damage versus risk perception: Why do house prices recover after hurricanes?

Abstract I study house price dynamics following Hurricane Sandy to explain the common puzzling finding of a price drop followed by a complete price recovery. Applying a quasi‐experimental difference‐in‐differences research design on Zillow parcel‐level sales data combined with Federal Emergency Management Agency data on damaged structures, I show that the extent of direct damages drives the decline in house prices. The extent of remodeling expenditures, as estimated from building permits, is found to be responsible for causing the return of prices to pre‐storm levels. Comparing flood insurance take‐up rates in the affected and non‐affected areas within floodplains and similarly for outside floodplains, I find no revision in perceived risk in the floodplain. In contrast, there has been an increase in flood insurance take‐up rates in affected areas outside of floodplains after the hurricane.