The government is still assessing the total damage of Hurricane Irma – although as CNN Money reports, both Irma and Harvey have already racked up billions in damages – and all of us know that it’s going to take a lot of time before Florida returns to normal.
When a disaster strikes, the first priority is naturally protecting lives, disaster relief or emergency management and response– as it should be – but one has to wonder, what do all of these catastrophes mean from an economic point of view, especially when it comes to real estate…
What Is Exactly At Stake Here?
Most of us don’t think about natural disaster until they occur. With all of those recent disasters, you have to wonder, just how many homes are at risk of natural disasters?
According to a recent RealtyTrac report, staggering 43% of houses and condos in the United States are at very high risk of at least one type of disaster at any moment. This amounts to almost 36 million homes across the US with an estimated market value – get ready for this – of 6.6 trillion dollars.
Not surprisingly, California sits at the top of the list of states that are at risk. There, roughly 8.4 million homes are estimated to be at a high risk. Next up, again, not really all that surprising, Florida with more than 6.7 million homes at the same risk level.
How Natural Disasters Impact Real Estate
Unlike many other factors, like the state of economy for example, natural disasters are only a local phenomenon rather than a nationwide one. And while the rest of the country doesn’t really notice the effects of disasters, they are more than noticeable in that particular are – if only for a couple of months.
Most potential buyers lose the confidence in that location and mortgage operations become noticeably slow – and both factors hurt home sales in the area. As Market Watch reports, home sale prices increase at a much slower rates in these high risk areas than compared to the rest of the country.
As a matter of fact, according to data collected between 2005 and 2015, in low risk areas, the average price increases at a rate between 6.6% and 9.5%. On the other hand, in high risk areas prices have decreased by 2.5% and 6.4% during the same period.
But when it comes to the actual home value, disasters impact the real estate market in a completely different way. In a paradoxical turn of events, the average home prices in these high risk states seem to be higher than in the rest of the state. While they don’t grow as fast, they start at a much higher point.
Home Prices in High Risk States
For starters, an average home price in high risk states is around 170K dollars, while the price of very high risk state – located in aforementioned states like California – homes is more than 190K. When we compare this to very low risk areas that have an average property value of 150K dollars, we can clearly see that the difference is more than noticeable.
Moreover, this decade, home price appreciation has been much, much stronger in very high risk areas than in low risk ones. In the last few years, home prices in very high risk areas had a 20.4% increase compared to very low risk areas that saw a 10.1% increase.
This can be explained – partially at least – by the fact that the markets in high risk states change a lot faster than others. And as BuzzBuzz News reports, experts claim that the recovery from the recent housing crisis has been faster and stronger in very high risk areas around the country.
How Disasters Affect Home Buyers
Surprisingly, potential natural disasters don’t do much to influence a majority of potential home buyers. In fact, factors such as weather and business opportunities have a much larger effect on the decision making process of modern buyers.
As history has shown, a natural disaster, while impacting the real estate market for a certain period of time, doesn’t actually have a long lasting effect. We can clearly see from the infamous Loma Prieta earthquake, which occurred 27 years ago.
The 6.9 magnitude disaster rocked Northern California, leaving 63 victims, destroying more than 11,000 houses and creating roughly 6 billion dollars in damages in the process. As you can expect, nervous home buyers started backing out of their real estate deals.
Since only a couple of older homes were destroyed beyond repair during the earthquake, most home buyers were ready to wait for some minor damages to be repaired – such as cracks in the driveway – to be prepared before continuing with their purchase.
According to researchers from the San Diego State University, only small decrease in real estate property values correspond with the earthquake, however, the economic conditions in the country of the last decade of the 20th century had a much larger impact on the market.
What about Buyers’ Awareness?
The impact natural disasters have on the market makes a lot of sense from the buyer’s perspective when you think about it. Since a ton of information is freely available online, these days, homeowners don’t have any excuses for being uninformed.
When it comes to both private and commercial real estate, buyers are now able to make a good decision on where and what type of property to buy, based on all of the information that’s out there. Nonetheless, future property owners should still consult a real estate agency before making any decisions.
A good real estate company will be able to explain specific insurance coverage the customer should look into before buying a property. And of course, if the buyer isn’t too familiar with the potential risks a good realtor should explain how natural disaster will impact the price of the property they’re looking at in the long haul.
The Bottom Line
Some of the more high risk areas in the country are located along the coastline, which has some of the US’s most beautiful and picturesque settings. So you can’t be all that surprised that people are still flocking into these beautiful regions.
Although natural disasters have a significant short term impact on the real estate market, as we said already, things like the economic climate have a far greater impact. But when like everything else, being aware of any possible risk is more than important when it comes to buying or selling a home.