For homeowners in places devastated by last week’s storm, it’s hard to imagine their local real estate market ever coming back.New Jersey’s Seaside Heights, for example, sits on a barrier island that took a direct hit from Sandy.
Between 80 and 90 per cent of its properties were damaged, and it will be six to eight months before it even has natural gas pipelines back in place, according to the borough’s city council.
Holli Peele, a real estate broker on another barrier island 400 miles south, knows a bit about how Seaside Heights residents feel.
She lived through Hurricane Isabel in 2003, which destroyed 30 to 40 homes on North Carolina’s Outer Banks, damaged countless more, and cut off her town of Cape Hatteras for two months after the storm carved an inlet that took out the main highway.
But Cape Hatteras rebuilt and prices rebounded—two years after Isabel, real estate values in the town hit an all-time peak, Peele says. That fits with the findings of new research on major hurricanes’ effects on home prices—in most damaged and destroyed areas, real estate tends to bounce back several years following a mega-storm.
Craig Landry and Okmyung Bin, economists at East Carolina University’s centre for Natural Hazards Research, recently assessed the effects of Hurricanes Fran (1996) and Floyd (1999) on real estate prices in hard-hit Pitt County in North Carolina. Floyd, the worse of the two, caused record flooding, damaged more than 4,300 structures, and caused losses estimated at $346 million in the county.
The researchers found that home prices in the county’s floodplain dropped over two to three years after both storms compared with prices for similar homes in other areas—by almost 6 per cent after Fran and nearly 9 per cent after Floyd. But by 2004 or 2005, those price discounts had completely disappeared – much earlier than the researchers had expected. (Their study will appear in a forthcoming issue of the Journal of Environmental Economics & Management.)
There are as yet no firm numbers on how many homes were destroyed or damaged by Hurricane Sandy. But an analysis by real estate data provider CoreLogic on October 27 estimated that more than 75,000 New Jersey homes valued at $22.5 billion were at risk; in New York, it was 82,000 homes and $35 billion. Eqecat, a company that builds models of catastrophic risk, estimates the cost of the economic damage is as high as $50 billion.
Even so, an October 2010 analysis from the Federal Reserve Bank of Dallas could be good news to homeowners hit hard last week – the decrease in housing supply could drive values up. The researchers looked at 13 hurricanes that caused significant damage in 99 towns and cities on the eastern and southern coasts from 1988 through 2005. On average, local economies were disrupted and incomes fell slightly, which caused downward pressure on house prices, says study coauthor Anthony Murphy, a research economist. But that effect was overwhelmed by the decreased supply of houses. Overall, prices actually increased between 3 and 4 per cent over what they otherwise would have been by three years out, Murphy and his coauthor found.
They also discovered that the effect on prices varied depending on an area’s density. In less populated suburbs, values grew less because not as many houses were destroyed and so demand wasn’t as acute, Murphy says. That means prices in high-population areas like Hoboken could rebound quickly, while suburbs like New Brunswick and Edison in New Jersey’s Middlesex County could take longer to come back.
A recovery could also be delayed for higher-density working-class neighborhoods like New York’s Far Rockaway and Coney Island, where flood insurance is likely to be rare. In the northeast as a whole, a recent insurance industry survey found that only 14 per cent of homeowners have flood insurance, and that figure is likely to be higher than the actual rate in middle- and lower-income neighborhoods. That lack of insurance policies in these areas also means that rebuilding efforts likely will take longer—in the aftermath of Hurricane Katrina, reconstruction in areas that used private money and insurance funds proceeded faster than in areas where public money was used, according to a 2007 report by USA Today.
The lack of flood insurance is only partly an issue of money, though. Landry and Bin of the centre for Natural Hazards Research also attribute it to the “availability heuristic,” or when people don’t have a clear picture of the precise level of risk that an activity involves — like buying a house in flood plain in hurricane alley.
For example, between 1998 and 2000, the number of flood insurance policies quadrupled in Pitt County after Hurricanes Fran and Floyd, but by 2003 had fallen 47 per cent as people forgot about the disasters and let their coverages lapse. “In the wake of a storm, you have visual images… about how bad a flood can be,” Landry says. Over time, though, “those memories fade away, so the psychological imagery that you need to embrace and think about risk fades.”
That matches what Peele has seen in Cape Hatteras, which has been hit by four hurricanes in nine years. “The buyers who come, they love it here,” she says. The possibility of future storms doesn’t figure much in their decision-making, she says.
Nationally, Hurricane Sandy shouldn’t affect the housing market much, says Walter Moloney of the National Association of Realtors. This is expected to be the best year for home sales in the past five years, according the NAR, rising by a projected 9 per cent. The NAR also predicts an 8 to 9 per cent rise in the number of sales for 2013.
But Moloney acknowledges that New Jersey also makes up a significant portion of the national housing market— in 2010, it ranked 11th for home sales among the 50 states. Sales in areas with widespread damage are going to take a long time to recover, though demand could also surge in surrounding areas that weren’t damaged, Moloney says.
And even before the storm, New Jersey had the second-highest inventory of homes facing foreclosure, and was the third-worst state for home depreciation in September, according to CoreLogic. Combine that with a disaster like Sandy, and the result can be long-term blight, Bill Keogh, Eqecat’s president, told Bloomberg last week.
One short-term silver lining will be the increase in construction activity to replace lost homes. “Hurricane Sandy’s destruction will likely spur more activity on the East coast,” Tom O’Grady of the National Association of the Remodeling Industry said on November 1. But the storm’s timing is also a problem—lumber stocks are lower in winter, and Gary Vitale, president of the North America Wholesale Lumber Association, told Reuters last week that the winter weather would limit the pace of repairs.
The bigger picture is understandably remote for people who lost property or loved ones in the giant storm. “I feel for all those people,” says Peele, who went through the post-Isabel recovery. “It takes time. You just have to work together and come back.”
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