There’s not much that the federal government can do to make housing less costly; most of the action must be at the state and local levels. But there are a few areas where federal regulations or guidance, backed by subsidies, make housing development more expensive or difficult.
One such area comes out of the National Flood Insurance Program (NFIP). The NFIP insures property owners against the risk of catastrophic loss from flooding. In the United States, regular homeowners’ insurance policies do not cover flooding or other “acts of God.”
The NFIP generally attempts to charge owners of new structures in floodplains an actuarially fair rate that reflects the risk of flood damage. However, the program grandfathered existing structures into heavily subsidized rates, encouraging beneficiaries to rebuild — sometimes multiple times — in high-risk flood zones. Premium growth is capped at 18 percent per year. As of 2023, only one-third of policyholders paid an actuarially fair premium, with the remainder paying substantially less — at an anticipated cost of $27 billion to US taxpayers by 2037.
The main way the NFIP reduces housing affordability is through its regulatory requirements. The NFIP requires states and localities to adopt flood management regulations before their property owners can participate in the program. Some of these regulations are reasonable, but others are crude or outdated.
These requirements are how the NFIP attempts to control moral hazard, the tendency of insured parties to behave in ways that increase the likelihood of the insured risk occurring. Without requiring some form of flood loss mitigation, the NFIP would likely encourage more construction in floodplains, as well as building techniques that may be cheaper but less protective — risks that the program could not easily monitor and therefore could not price accurately.
It is understandable, then, that the NFIP seeks to encourage mitigation measures. But its approach of working through local governments rather than individual property owners has often encouraged excessive and unnecessary regulations that increase the cost of housing production without a clear mitigation rationale.
For example, the NFIP requires every participating community to adopt a floodplain management ordinance. These ordinances give local governments the authority to regulate development in floodplains, defined as areas with at least a one percent annual risk of flooding.
While some regulations might be reasonable — requiring buildings to be elevated above the 100-year high-water mark, for instance — localities have frequently taken the opportunity to ban residential development in the floodplain altogether. Fort Collins and Brighton, Colorado, have both banned new housing in the floodplain, no matter how it is built.
Until recently, Lebanon, New Hampshire allowed single-family housing but banned multi-family housing in the floodplain. Perhaps realizing that this distinction had no rationale in sound flood management practice, the city council repealed the ban on multi-family housing in 2019.
Outright prohibitions of manufactured housing in floodplains are common nationwide, even though such homes can be made as safe as other single-family houses through anchoring and elevation.
Another common regulation not technically required under federal law is to make new housing development in floodplains subject to a discretionary public hearing process, rather than relying on the judgment of technical staff. It is not clear how the general public would be better qualified to assess the flood-resistant qualities of new construction than trained professionals, but making permitting discretionary and subject to public hearings does create more opportunities to delay or block new residential development.
FEMA, which administers the NFIP, explicitly encourages communities to adopt “more restrictive” floodplain regulations than the minimums set forth in federal law. The Community Rating System gives policyholders discounts in communities that implement anti-development regulations in floodplains and watersheds, giving them an incentive to do so.
Examples of regulations that FEMA explicitly encourages include larger minimum lot sizes, applying the stricter International Building Code to a wider range of development, placing open space into public ownership for conservation, and prohibiting residential or commercial development in floodplains. Communities are then scored using a complex points system that rewards adoption of these measures.
If the NFIP charged policyholders market-based premiums on new construction, there would be less need to encourage localities to adopt specific regulations. Those premiums would reflect flood risk, which communities could reduce through a range of mitigation strategies. But does FEMA actually know how effective each of these strategies is? The Community Rating System has the appearance of scientific precision, but the weights assigned to its components are ultimately arbitrary.
Giving communities credit for applying the International Building Code is an example of this arbitrariness. The IBC applies higher standards to development than the International Residential Code, but most of those standards have nothing to do with flooding. Requiring costly sprinkler systems for small buildings drives up costs without improving safety much.
In fact, the Government Accountability Office says that the Community Rating System does not reduce flood risk by as much as the premium discounts that participating communities receive: “The amounts of CRS discounts — both to individual properties and program-wide — are not closely linked to potential loss reduction of currently insured properties.” As a result, they say, policyholders in non-CRS communities are cross-subsidizing those in CRS communities.
Unfortunately, much of the damage may already be done. By incentivizing strict floodplain regulations, the NFIP has given localities a tool that can be used for exclusionary purposes. Reforming or privatizing the program will not put the genie back in the bottle, but it could reduce incentives that encourage even well-intentioned communities to maintain stricter regulations than they otherwise would.
Ideally, the federal government would no longer provide flood insurance. Private flood insurance is available in countries like the United Kingdom and France, and there is no clear reason it could not function in the United States as well.
If that is not politically feasible, FEMA could at least revise the Community Rating System to reward outcomes rather than the regulatory tools assumed to produce them. Instead of rewarding communities for increasing minimum lot sizes, it could reward reductions in impervious surface area, perhaps measured through satellite imagery. Instead of rewarding stricter building codes, it could reward policyholders for elevating structures above base flood elevation or locating them near higher-capacity storm sewers. Residents could then pressure local governments to adopt the specific mitigation measures that reduce flood risk and, in turn, premiums.
Reforming flood insurance will not solve the housing shortage on its own, but it could help at the margins. As federal policymakers consider ways to address affordability, this is one of several levers worth examining.
