The building industry explains the importance of the NFIP
The below comes from the March 25, 2004 hearing of the Subcommittee on Economic Policy, National flood insurance repetitive losses (emphasis added)
Excerpt from the prepared statement of Steven M. Feldmann Director of Community Affairs, the Fischer Group, Cresentview Hills, Kentucky on behalf of the National Association of Home Builders
The Federal Emergency Management Agency's (FEMA) National Flood Insurance Program (NFIP) plays a critical role in directing the use of flood-prone areas and managing the risk of flooding for residential properties. The availability and the affordability of flood insurance gives homebuyers and homeowners the opportunity to live in a home of their choice in a location of their choice, even when the home lies within a floodplain. The home building industry depends upon the NFIP to be annually predictable, universally available, and fiscally viable. A strong, viable national flood insurance program enables the members of the housing industry to continue to provide safe, decent, affordable housing to consumers, in a design of their choice and in a location of their choice. The choices American consumers make when they are buying homes are some of the most critical aspects of the homebuying process. Through decisions about where to live, where to shop, and how to get around town, consumers apply the power of the marketplace to shape the Nation's communities. The NFIP, by enabling the choice of purchasing a home in a floodplain, allows consumer preferences to shape towns and cities into communities that maximize quality of life and economic development. Without the NFIP, many communities would be unable to provide affordable housing to many of their citizens. Despite a decade of unprecedented prosperity, many communities are seeing a growing gap between the supply and demand for housing. Families across the economic spectrum are finding it increasingly difficult to find a home that meets their needs. One of the leading causes of the housing affordability problem is the shortage of buildable land. By guaranteeing affordable flood insurance, the NFIP allows communities to use land that would otherwise be too costly due to high flood insurance premiums. Through the NFIP, flood insurance policies remain available and affordable and residential structures can be constructed in floodplains as long as they are built to withstand flooding. Therefore, the NFIP provides the means by which communities can address housing needs by making homeownership in areas prone to flooding safe, affordable, and practical.
The dominant narrative surrounding the NFIP includes a bit about raising the cost of coverage so homeowners 'understand' the flood risk and/or they take responsibility for building in an area prone to floods. The testimony above demonstrates the building industry as the unseen middle man between homeowners and flood risk.
Builders would be hard pressed to invest in developing land if they didn't think they could sell the homes. Thus, the "annually predictable" availability of NFIP is important for lending some stability to the building industry.
The testimony also suggests an issue with the availability of buildable land in the US. I don't know the numbers around this but it is a worthwhile point. Some growing areas have limited buildable land, making areas that may flood on occasion (once every couple hundred years "on average") appear viable.
Perhaps this is similar to deep ocean drilling versus fracking debates. Both have inherent risks and both are expensive, but depending on the economic and social context, the risks inherent in one becomes comparably tolerable to the other or to alternatives such as, imports from unstable nations.
In this way, building in a flood plain seems less risky then not building at all, limiting available housing, affecting the mortgage market, and stymieing the construction industry.
It is my point here, that the NFIP does something other than offer cheap(er) insurance to so-called irresponsible homeowners. It provides stability to the residential construction industry and encourages continued real estate development across the US, which is remarkably significant to the US economy.
Whether this is desirable is open for debate. It is likely the American Dream of homeownership and all the regulations and fiscal advantages attached to this politically powerful symbol that leads to issues of "overbuilding."
Few go out and build their own home, fewer still build subdivisions. The typical homeowner is buying a house in a desirable location: close to work, community and leisure activities. The nicest home they can afford. They did not choose to develop a community in a flood plain because insurance was cheap. Though they may have chosen to buy a home in a community made economically viable by the availability of affordable flood insurance.