Catastrophic flooding and the response of the real estate market

In February 1986, the levee of the Yuba River broke, flooding the towns of Linda and Olivehurst in northern California. Besides the personal tragedies, were economic disasters. Property values of the houses plummeted. While theories of natural hazards predict that the market will capitalize the risk of flooding into the value of residential property, in areas where the probability is low the risk may be ignored. Factors are the history of past floods, socioeconomic conditions, and the real estate market. Housing prices in Linda and Olivehurst did drop (effectively to zero) immediately after the flood, then recovered relatively quickly to a level significantly lower than before the catastrophe. This suggests that the previous prices did not fully capitalize the risk of this intermittent hazard.