After the storm: Adjusting to natural disasters
The first anniversary of the disaster wrought by hurricanes Katrina and Rita, which destroyed more than 400,000 homes in New Orleans and along Mississippi's Gulf coast, raises questions about how an area's housing market recovers from disaster — and about the wisdom of locating housing along historic or scenic waterfront areas that are vulnerable to storm damage. Bringing perspective to this dynamic housing picture is Kerry Smith, an environmental economist who recently joined the faculty of the W. P. Carey School of Business. He is co-author of "Adjusting to Natural Disasters," a study evaluating years of housing data collected since Hurricane Andrew, which struck South Florida in 1992. The results of this study shed some light on the prospects of the current Gulf Coast recovery.
The first anniversary of the disaster wrought by hurricanes Katrina and Rita, which destroyed more than 400,000 homes in New Orleans and along Mississippi's Gulf coast, raises questions about how an area's housing market recovers from disaster. It also spotlights questions about the wisdom of locating housing along historic or scenic waterfront areas that are beautiful and desirable but vulnerable to storm damage.
In addition, controversy over homeowner's insurance coverage — wind damage vs. hurricane-surge water damage — has been brought to the attention of the insurance industry and the courts. Adding to that already problematic picture is the massive cool-off in the once-booming national housing market.
Bringing perspective to this dynamic housing picture is Kerry Smith, an environmental economist who recently joined the faculty of the W. P. Carey School of Business. Among his body of work is "Adjusting to Natural Disasters," a recently completed study that Smith co-authored. The study evaluated years of housing data collected since Hurricane Andrew, which struck South Florida in 1992. Andrew was the biggest U.S. natural disaster until Katrina.
The study was funded by CREATE — Center for Risk and Economic Analysis of Terrorism Events — a university-based research center supported by the Department of Homeland Security. Results, which shed some light on the prospects of the current Gulf Coast recovery, show that South Florida housing values suffered a long-term setback of about 19.8 percent and that such disasters leave afflicted areas with more upper-income and lower-income residents and fewer in the middle class.
"People adjust to the risks presented by natural disasters in a number of ways; they can move out of harm's way, they can self-protect, or they can insure," the study states.
Coming and going
Smith said the study's purpose was to understand how different segments of the population adjust to large-scale damage associated with natural hazards. By having a measure of the extent of damage and looking at the composition of the households before and after the event — who moved in and who moved out — Smith's work looks at whether people learn about hurricane risks.
Although it may seem irrational for people to live in severe-weather areas, coastal population growth has continued because the well-off can afford the risks and the poor or disadvantaged have no choice but to stay where they are — assuming their homes are spared destruction — or to rent in a high-risk zone.
Smith says the prospects for the Mississippi Gulf coast area, where more than 150,000 homes were ruined, are brighter than in the New Orleans area, where an estimated 228,000 homes were left uninhabitable and authorities are loath to allow rebuilding in the lowest-lying areas. "The situation there [in New Orleans] is much more complex — normal supply response is unlikely because so much of the infrastructure is destroyed," Smith says.
"In addition, there is great uncertainty about what will be allowed. Finally the applications for building have overwhelmed local government's ability to review them, so delays are apparently incredible." Also, because the brunt of Hurricane Andrew spared Miami, its lessons are not as applicable to metropolitan New Orleans. "What we can say is that it is folks in the middle-income group who will be more likely to leave; to the extent there continue to be amenities that attract the high-income households, they will find ways to accommodate problems," Smith says.
"It is not clear what will happen to the lowest-income, because much of the destruction was to areas where they lived and there is no infrastructure to sustain any activities locally." Indeed, it is widely estimated that more than 200,000 former residents of New Orleans, mostly working-class African-American families, are still spread across 44 different states. Others may find themselves in satellite areas outside the city, Smith observes, based on his talks with other academics.
The refugees' prospects for return are not helped by the fact that, with an estimated 108,000 rental and 120,000 owner-occupied housing units flooded in the New Orleans area alone, scarcity has pushed up sale and rental prices about 39 percent, according to the Brookings Institute.
By wind or by water?
Insurance, and the controversy and lawsuits surrounding it, loom large. Private insurance covers hurricane wind damage but not damage from the tidal surges hurricanes cause. This type of water damage is what the National Flood Insurance program covers: For nearly four decades flood insurance principally has been the responsibility of the federal government under the NFIP.
Much of the August 2005 damage was caused by flooding rather than wind, but apparently only about a third of residents had bought NFIP flood insurance. Still, many homeowners feel ripped off when they pay for homeowner's coverage and get no settlement. "Insurance companies are arguing about what caused damage to homes so it is an ongoing source of litigation," Smith says.
"The central issue is what is the event set that one is insuring against; insurance companies have been vague in these definitions and homeowners have not paid attention to the implications of their coverage, assuming instead they were insured to the limits of the overall policy, when in fact there are conditions that limit the liability of the insurance company."
What can or should be done about this? "This is an issue of information-disclosure requirements," Smith says. "Many jurisdictions require specific information-disclosure forms as a condition of seeing a house, or, at the point of sale, an analogous case could be made for for mandating the provision of clear information on the policy's limits, in layman's terms."
Private insurance since Katrina and Rita has been more expensive, Smith says, and coverage is more limited. Federal flood insurance offers a bailout that encourages people to live in dangerous but "amenity rich" coastal areas.
Buy now, pay later
Are there are some post-Katrina/Rita home bargains to be had if the buyer is willing to take the risk? "In relative terms, maybe," Smith says. "My results suggest that the high-amenity areas have not suffered — some of these are high-risk as well but the high-income folks apparently self-insure and self-protect."
"There are areas in Florida where the rate of appreciation in price has been lower just because the market has implicitly defined them to be higher-risk based on FEMA maps. My results do suggest to date they may not have experienced hurricanes, so if one believes these discounts will eventually go away as the time since the last hurricane elapses, then these locations might just offer some "buys" — if you are feeling lucky. But it is high-risk because there is some evidence that storms are getting more intense — not that there are necessarily more than normal but instead what we get will be more severe."
What does Smith's other research on the topic tell us about Katrina and Rita and their implications for the future? "Simple public policy changes will enhance willingness to evacuate — for example, assuring all people that there will be accommodations for pets. It sounds stupid but it reduces resistance to leaving," Smith says.
He says higher-income residents are more likely to have emergency supplies, so there is a public role in providing supplies for households below the median income. Based on his Florida work, Smith says, "Markets do indicate people recognize the risk of hurricanes and that there are reductions in price for properties perceived to be more risky."
No middle ground
What do Smith's findings mean for the average manager, investor or consumer? "Coastal areas prone to hurricanes are likely to be populated by the very rich and those below median income," Smith says. "There is less attraction for those in the middle. This says something for those investing in properties and those considering business that would provide different types of coastal services."
Because home sales declined more than 11 percent in July, prices are slipping and the United States now has its biggest inventory of unsold housing in the past 10 years, the National Association of Realtors says. The government reports the median price of a new home fell from $233,800 in June to $230,000 in July. How will the cooling national housing market affect the comeback of New Orleans and Mississippi's Gulf shore?
"It should free up construction resources and reduce costs of new construction, including building materials, a bit," Smith says. "Mortgage markets are more complex due to the public role in reconstruction; the big issue is uncertainty and its effects on private investment. Here I don't think it is going to help, because I think these markets will be viewed as decidedly less preferred than the best of the previously hot markets. In short, I don't think private investors will now be regarding either location as a more secure investment opportunity."
Bottom Line:
- Mississippi's coastal areas have better prospects than the New Orleans area, which faces socioeconomic problems and limitations inherent in the most low-lying sub-sea-level neighborhoods.
- Insurance remains a problem because of more restrictive coverage and higher prices for private insurance, and the cost that federal flood insurance poses for limited-income households.
- High-income people will continue to live in dangerous but amenity-rich places because they can afford insurance and can afford to build to standards higher than those set by local codes.
- Home prices may decline, but bargain hunters had better beware the risks of coastal living.
- Environmental disasters cause an hourglass effect on the profile of high-risk areas: The middle class tends to shrink while the proportion of upper- and lower-income people grows.
Latest news
- Why does online shopping make me feel like absolute crap?
The uncertainty of online shopping can result in frustration, says an ASU marketing expert.
- Lab lessons: Modern Grind brews up expansion with help from ASU
Avondale's coffee, tea, and health drink drive-thru partners with the SMB Lab to empower…
- Lab lessons: Roadcase.com VP shares how ASU's SMB Lab fueled growth and efficiency
The Arizona-based audio/visual equipment case manufacturer gets expert guidance on improving…