Disaster Zone: How natural disasters impact home values

Natural Disasters are bad, for obvious reasons.

Today we are going to talk about the reasons specific to home values. When you consider a natural disaster like an earthquake, a hurricane, or a flood, you think well – we lived through this one, so we probably have a couple of decades before another one hits the same exact area. Nowadays – and we won’t get into the debates surrounding the increase in these types of events – we know that just because your real estate survived a major event doesn’t mean anything. The next disaster could be weeks, or days away.

Historically, natural disasters decrease home prices as cities take years to rebuild and replace infrastructure. Many citizens will give up on the area and move to less disaster-prone cities. If you’re interested, the five cities least prone to natural disasters in America are:

1.       Juneau, AK

2.       Vancouver, WA

3.       Anchorage, AK

4.       Lewiston, M

5.       Casper, WY

Interesting, but not surprisingly, the median home price in Juneau is 25% higher than the national average. Vancouver is 11% higher.

Hurricane Katrina

Here is the exception to history, when it comes to home values crashing following a natural disaster. The hurricane wiped out entire neighborhoods which lead to housing shortage. Many left. But many stayed and investors saw a big opportunity in renovating damaged homes. It’s true that the city continues to face challenges in regard to infrastructure and economic inequality and the increase in home prices was not across the board. Still, home prices overall started jumping significantly within just a few years of Katrina. In some places, prices increased 80% in the decade following.

What’s different now vs. then?

A housing shortage. A nation that has been underbuilding for well over a decade since the not so natural disaster that hit the housing market nationwide in 2008. So while cities directly impacted by disasters will certainly see a drop in home values while they rebuild, what happens to the prices in surrounding areas where home affordability is already pinched? This is where a natural disaster layered on top of a housing shortage with an affordability crisis sprinkled on top gets really depressing.

Fires aren’t great either.

Here is Northern Nevada, we are very familiar. We have our own fires to deal with, plus the California fires, even the smoke from Oregon fires blows down on us. It’s starting to impact our insurability. It’s being called a crisis of its own – the property insurance crisis. Several hundred homeowners in Northern Nevada had their homeowner’s policies straight up cancelled this year due to wildfire risk. The cost of insurance for many of my borrowers is climbing and is attainable at all. Insurance companies want to review the inspection reports, even the appraisals, before they are willing to bind coverage. We deal with repairs required not by the buyer or lender, but the insurance company in order to close. And this was before the Washoe Valley Fire.

Is a NV Fair Plan on the horizon?

You may have heard about the California Fair Plan. It’s actually been around since 1968 and was created as a last resort option for homeowners in high-risk areas to be able to obtain homeowner’s insurance when every carrier in the private market backs out. Here is the interesting thing about homeowner’s insurance. Unlike flood insurance, it is not federally regulated. The Department of Insurance in each state sets its own guidelines. The department in Nevada does not allow carriers to segment fire zones but they are allowed to not insure certain areas. It’s all carrier to carrier and when I talk to my friends in the insurance biz – they say it’s a nightmare.

So do we need a NV Fair Plan? It would give everyone access to insurance. Think about healthcare though. When the exchange gave everyone access, costs for everyone also went up. The CA Fair Plan is not what I would consider affordable, by any stretch of the imagination. The annual premium for our lake house is over $5k and we still need regular homeowner’s insurance in addition. However, we wouldn’t be able to purchase that home if it weren’t for the CA Fair Plan because no other carrier would insure it and if you have a mortgage – homeowner’s insurance is required.

Do you see the burden of insurance costs impacting the value of homes?

I want to say it should, but I also know that even when interest rates hit 8%, home prices didn’t blink. They won the stare down because the demand SO FAR EXCEEDS the supply. I’d love to hear your thoughts though, so please chime in.

Quick Economic Update to Close

Rates are up half a percentage point over the past week. So I can’t leave you hanging without a quickie update on the economy. The jobs report blew up my day last Friday. Everyone started talking about a soft landing again, forgetting all about the job loss recession we were worried about – especially since the jobs report revised previous months’ readings up!  Now we have a new scenario to discuss:

“No landing?!”

Maybe the US Economy just keeps growing. That leads to inflation reigniting. Then the Fed doesn’t cut shit, let alone the Fed Funds Rate. I’m not being dramatic. That jobs report was solid, through and through. Plus the 10-year breakeven rate, which measures bond traders’ inflation concerns, reached a 2-month high. Are we at risk of overheating? Well, CPI numbers for September say maybe. Inflation slowed but not much. Not as much as we were expecting. Prices are up 2.4% from a year ago. Last month they were up 2.5%. We are getting closer to the Fed’s 2% goal but at a snail’s pace. Most economists were predicting a reading of 2.3% for September.

PPI comes in Friday morning, I’m recording this Thursday – let us pray.