It’s looking like a once-in-a-generation hurricane season for the southeastern United States. Harvey has left at least 70 people dead and battered nearly 200,000 homes along the southern border of Texas and Louisiana. Meanwhile, Irma has wrecked several Caribbean islands and is threatening Florida and other portions of the coast with the prospect of more lives and homes lost, and years of painful rebuilding.
Once lives no longer hang in the balance, the attention inevitably will turn to longer-term devastation: What happens to the real estate in those storm-ravaged towns and cities?
It might not be what you think.
While many assume that residents will abandon their homes en masse and property values will plummet after a big natural disaster—as happened in some New Orleans neighborhoods after Hurricane Katrina in 2005—that’s not always the case. In fact, with Hurricanes Jose and Katia brewing offshore behind Irma, a look back at the two most destructive storms in recent U.S. history, Katrina and Sandy, show just how dramatically the levels of destruction and speed of recovery can vary.
“We see a big disconnect between the [neighborhoods] that were hit and those that were not hit” in some storms, even within the same city, says Todd Tomalak, vice president of research at John Burns Real Estate Consulting, a nationwide firm. “The areas nearby not directly hit by the storm continue chugging along.”
And while prices are likely to drop initially, they usually don’t crash entirely. They’re likely to rebound within a few years.
Hurricane Harvey: Disastrous flooding and contaminated water
Houston home sales, of course, have slowed since Harvey deluged the city. But not all homeowners across the metro area are feeling the same pain. Homes in areas that didn’t flood might actually be worth more now than they did before the floods, as folks whose properties were badly damaged begin to look in earnest for safer places to live.
This has happened in previous (albeit smaller) Houston storms. In the city’s Meyerland neighborhood, which has flooded four times since 2015, median prices fell by 16% year over year after the third flood, according to John Burns. However, property values in the rest of the city went up.
“In a flood like this, if you’re high and dry, you’re considered to be a very attractive address,” says Houston-based real estate broker Cheri Fama of John Daugherty Realtors.
Harvey will cost Texans about $40 billion to $50 billion in repairs and rebuilds, according to Enki Holdings, a Savannah, GA–based disaster data analytics firm. An estimated 10% to 15% of those homes are beyond repair and will need to be demolished.
“It’s a mess to clean up. But many structures will probably not be lost,” says Chuck Watson, director of research and development at Enki Holdings. “That’s a very big difference with Katrina. With Katrina, the flooding reached all of the way up to the rafters.”
The problem is that the longer the homes are underwater, the more damage is done, as the water seeps into the walls and compromises the structures. That’s what happened in New Orleans. On the other hand, if the water inundates a home and then runs out all at once, the impact could weaken the already compromised structures and the homes could collapse.
“It’s a Catch-22,” Watson says. “You want it to drain out fast, but not too fast.”
One big advantage Houston has over New Orleans after Katrina is that the Texas city sits above sea level. That means the water will drain out on its own. In New Orleans, the water had to be pumped out.
But the Houston-area water is more contaminated with chemicals, oil, and sewage.
“All of a sudden you have to go a lot further in cleaning the mess up and drawing the water,” says real estate appraiser Orell Anderson of Strategic Property Analytics in Laguna Beach, CA, who worked in New Orleans after Katrina. This is due to the many chemical and oil facilities as well as the 13 Houston-area toxic waste sites that flooded.
“You’ve got bacteria and fungus and sewage in your walls,” Anderson says. “That takes a lot more than just drying up the carpet.”
Despite all of this, local home prices probably won’t fall as much as initially feared, says national real estate appraiser Jonathan Miller, who worked on Sandy-damaged homes after the 2012 storm. That’s because many of these affected homeowners have mortgages they still need to repay, so they can’t afford to sell at a big discount. They’re more likely to fix up their homes and wait a bit until the market improves.
However, the storm might lead to a rash of foreclosures and short sales in Houston from homeowners living paycheck to paycheck who lost jobs or can’t come up with the money for large-scale repair jobs.
And the disaster could have big ramifications in the rest of the state. Texas is currently facing a housing shortage as more companies, and therefore workers in need of housing, relocate to the region for its lower taxes and cost of living. But with construction labor and materials headed to help rebuild Houston, fewer sorely needed homes will go up in the other parts of the state. And that could push prices straight up.
Hurricane Irma: A catastrophe in the making
The scope of destruction that Hurricane Irma will inflict on the U.S. is still unknown. As of this writing, the storm has already killed 18 people in the Caribbean and is projected to reach South Florida on Saturday.
“Little wobbles [in the storm’s path] can make a big difference,” says Enki Holdings’ Watson. “There’s a whole bunch of ‘ifs.'”
Nearly 8.5 million Florida residential and commercial properties have a high, very high, or extreme risk of wind damage from Irma, according to real estate data provider Core Logic. The company estimates that about 3.5 million properties are at risk from storm surge damage.
The luxury, waterfront high-rises along the Florida coast are likely to be battered by the hurricane and storm surges from the ocean. Some condos in Miami could lose 30% of their value—or much more—as a result, says Deerfield Beach, FL–based real estate consultant Jack McCabe.
About three-quarters of the units in these fancy Miami Beach towers are owned by foreign investors, the majority of whom don’t live in them full time, according to McCabe. (Florida is the top destination for foreign buyers, who made up about 22% of the state’s overall purchases as of March 2017, according to the National Association of Realtors®.)
“Investors who hadn’t sold yet are going to start dumping these things even if they have to lose money,” McCabe says. “This is going to cause a lot of people to change their minds about having a condo on the beach in South Florida.”
Worsening matters is rebuilding efforts in Florida won’t be cheap. The city is so far south that finding masses of construction workers and transporting materials will likely cost far more than the rebuilding efforts in Texas.
Delays to rebuilding: Not enough homeowners have flood insurance
Compounding the rebuilding challenges: The majority of homeowners likely to be hurt by these disasters do not have flood insurance. It’s estimated that about 80% to 85% of Houston homeowners don’t have the policies. And only about 42% of homes in Florida’s coastal counties are covered, according to the Associated Press.
That’s partly because only homeowners living in federally defined special flood hazard areas (i.e., flood zones) are typically required to get flood insurance if they want a mortgage. So folks who don’t live on the coasts or have already paid off their homes might opt not to carry it.
Annual premiums for flood insurance can top $1,200 in some parts of the country but are usually about half of that, according to ValuePenguin, a consumer spending information website.
However, even those with the policies could be waiting weeks—if not months—to receive any money as the priority goes to the most damaged homes, says Michael Barry, spokesman for the Insurance Information Institute, an industry-funded group based in New York. And that’s if the damage was clearly caused by flooding, and not winds. Wind damage is typically covered by basic homeowners insurance.
And if the cause of the damage is murky—as was the case with many of the New York and New Jersey homes slammed by Sandy—it could take more time to figure out who’s on the hook for the repairs.
The Federal Emergency Management Agency does provide grants up to $33,300 to repair homes, replace lost property, and provide rental assistance for those displaced by storms for up to two months.
But homeowners must jump through hoops to get the money and often receive much less than the maximum, says Robert Meyer, co-director of the Risk Management, Decision Processes Center at the University of Pennsylvania in Philadelphia.
Lessons learned from Hurricanes Sandy and Katrina
While each storm is different, there are a few lessons to be learned from previous hurricanes.
After Sandy hit the New York City region in 2012, “the expectation [was there’s] going to be a rapid price cut due to all of the devastation—and that didn’t shake out,” real estate appraiser Miller says. “Sales just stopped.”
Prices didn’t reach rock bottom because sellers, who knew their homes weren’t going to fetch top dollar anytime soon, pulled their homes off the market. Even those whose homes weren’t damaged had to contend with trees and power lines down, bargain-seeking buyers, and a reluctance from potential buyers to move into an area that needed years to recover.
“Only sellers who needed to sell would sell,” Miller says. They typically saw a 5% to 15% price reduction.
It took at least three years for the market to stabilize and buyers to return after the storm, says real estate broker Annette Farina of Belle Harbor Realty. Her brokerage is based in the Rockaways, a peninsula in Queens, NY, that got walloped by Sandy.
Now, the number of sales and property values are back to what they were before the storm, with sellers getting full asking prices, she says.
Property values took much longer to go back to normal after Katrina in the hardest-hit parts of New Orleans, many of which were also some of the poorest. But that’s also due to the financial crisis and ensuing recession that pushed home prices down all over the country.
Case in point: the St. Bernard Parish in New Orleans, overtaken by floodwater in Katrina. Nearly 130 people in the parish died due to the storm, and nearly all of the homes were damaged, many beyond repair. In July 2005, a month before Katrina, the average home price was $127,380, according to the Gulf South Real Estate Information Network. A year later the average price plummeted nearly 70% to hit $38,733.
It wasn’t until 2014 that the average price of a home in the parish sold in July topped what it was before the storm. In July 2017, the average home price in the parish was $172,759, according to the most recent data available.
But right after the storm, prices in the New Orleans metro area went up 8.73% from 2005 to 2006, according to NAR data. There were few folks buying in the worst-off areas, but the areas spared the wrath of Katrina suddenly became especially attractive to buyers.
“There was a good number of investors,” says New Orleans–based luxury real estate broker Dorian Bennett of Dorian Bennett Sotheby’s International Realty. “People are always trying to make money off of situations that are problematic.”
No one knows what will happen in the aftermath of Hurricanes Harvey and Irma. But what can be gleaned from past disasters is that the hurricanes aren’t likely to keep buyers away for long.
“People pay significant premiums to be on the water” and likely won’t be deterred by a big storm, real estate appraiser Anderson says. “[Most] people … arrive at the conclusion that that only happens to other people and not me.”
