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How Natural Disasters Affect Real Estate Markets
Across Texas, Florida and Puerto Rico, millions of Americans are beginning to rebuild their lives after the devastating impact of Hurricanes Harvey, Irma and Maria. Whenever a natural disaster strikes, the first and foremost priority should be the preservation of human life. But the aftermath of these disasters raises broader economic concerns.
Harvey and Irma combined to cause between $115 and $280 billion worth of damage to Texas and Florida. It is estimated that Irma alone may cost all insurers the total of 20 years worth of premiums. Maria could cost Puerto Rico somewhere between $45 and $80 billion. As a real estate agent, it is important to understand the economic impact these natural disasters, and how they affect real estate markets.
“Learn the impact points of national events. Understand which people and businesses are affected and how you can help them,” says Real’s supervising broker Steve Carvelli. “Look at the impacted market and the new markets that may benefit from relocation. Look for opportunity everywhere.”
43% of homes in the United States are at high risk or very high risk for some type of natural disaster, according to a 2015 report by RealtyTrac. This percentage accounts for 35.8 million homes with an estimated market value of $6.6 trillion. A majority of these homes are located in the southeast and west, and many are located near a coastline.
When natural disasters strike in these areas, the effects on the wider market are minimal, but the effects in that particular area are pronounced and long lasting. Prospective buyers may find the location less desireable after a disaster, and mortgage operations slow, both of which hurt home sales. The RealtyTrac study found that homes in low and very low risk areas experienced average home sale price increases of 6.6% and 9.5% respectively from 2005 to 2015, while high risk and very high risk areas have seen home sale prices decrease by 2.5% and 6.4% respectively in the same decade.
Impact on home values
Paradoxically, home values in high and very high risk areas tend to be higher than homes in low and very low risk areas. That’s because homes in higher risk areas tend to be more desirable places to live.
Homes in very high risk areas were found to have an average market value of $170,237, and homes in high risk areas had an average market value of $191,244. Compare this to low risk areas in which the average home value of a property is $154,464, versus an average property value of $151,793 for a home in a very low risk area.
In the past three years, home price appreciation has been stronger in high risk counties than in lower risk ones. Home prices saw a 16.6% increase in high risk areas between 2012 and 2015, and a 20.4% increase in very high risk counties. Compare this to the low risk areas, where home prices increased by an average of 10.1% over the past three years, or the very low risk areas which saw an average increase in home prices of 12.8% over the same time period.
While homes in higher risk areas may decrease in sale prices, they usually have a much higher starting point.
History suggests that attractive markets will rebound from the impact of a natural disaster. However, climate change presents a new, existential threat to these areas.
Scientists have concluded that while climate change didn’t cause Hurricanes Harvey or Irma, it certainly made them worse. How much worse? It’s hard to say exactly, but estimates on the cost of Harvey’s damage range from $65 billion to $180 billion. Irma did between $50 billion and $100 billion in damage. By comparison, Hurricane Katrina was up until this point the most costly natural disaster in US history, and it did $62.5 billion dollars worth of damage (Hurricane Sandy was the second highest with $29.5 billion).
As a real estate agent, it’s fair to consider whether these types of mega-disasters are the new normal, and the long term impact they will have on markets that were once thought to be impervious to the effect of natural disasters. Will markets rebound from natural disasters that are doing two or three times as much damage as they used to? It remains to be seen.
What You Can Do
In the aftermath of a disaster, there are several steps agents can take to preserve their business:
— Help your clients with their damaged homes: Don’t wait for an invitation. After a natural disaster strikes people are in dire need of assistance. Help families clean out their homes, inventory their belongings, and document the damage. You can also perform more basic services like delivering food and running errands.
— Help clients determine if their property is worth repairing: When determining the cost/benefit of a rebuild, it is important to keep in mind several factors: How likely is it that the property will be damaged again? Does the property qualify for renovation? Can the neighborhood support the value of a rebuild? Talk to your clients about these issues before they make a decision.
— Help clients apply for disaster relief: Educate yourself on relief services available to clients in the wake of a disaster. Help them file a claim with their insurer and register with FEMA for access to a variety of relief programs. In addition, certain corporations and charities may offer donations. Get a handle on all the different programs available to clients and then broadcast them on your social media networks.
— Help clients find new housing: Many clients will need immediate housing. Compile a list of for sale and rental properties in your area that remain in relatively good condition and present your clients with the options.
— Perform broker’s price opinion evaluations (BPOs): The government and banks need accurate pre- and post-disaster home valuations to determine how much assistance to provide homeowners.
— Be wary of predatory investors and scammers: Clients may receive offers from investors on their damaged properties. Inform clients to be wary of these types of offers, as investors often lowball property owners in order to take advantage of a bad situation. Similarly, scammers may try to take advantage of distressed property owners by offering deals on repairs and then taking off with the money.