Inman

Hurricane Katrina’s long-term impact on real estate

The devastation wrought by Hurricane Katrina will likely have little long-term negative effect on the housing market in the affected states, real estate experts say.

Despite the horrific scenario of 80 percent flooding in New Orleans, as many as 100 deaths and an estimated $25 billion in damage in Louisiana, Alabama and Mississippi reported today, industry figures held out hope for the future.

“The housing market will bounce back,” said Grant Thrall, a University of Florida professor who studies the effect of calamities on real estate values. “We have found from environmental hazards in general that the market has a very short-term memory.”

“You have very strong market fundamentals in these states,” said Walter Molony, a National Association of Realtors spokesman. “You have a very strong coastal draw and strong second-home market in coastal areas. You have people retiring to those areas.” Molony noted that all three states had record sales in 2004 and were on track to rack up new records in 2005 before the storms hit.

Molony pointed to Florida’s recovery from four major hurricanes in 2004 as an example. Months of temporary disruption were followed by a return of the red-hot housing market, with housing prices hitting new highs in 2004.

“We had the same thing happen in San Francisco in 1989: temporary disruption and bounce-back,” Molony said.

According to Thrall, such reactions are classic.

“Our past experience has shown us that the market recovers very quickly,” the geography professor said.

“We know from previous studies that 10 percent of the people who evacuated will not return. So we have a decrease in demand in the short run,” Thrall said. “That was the case with Hurricane Andrew (in Florida). Of all the people who left during the hurricane, follow-up studies showed that 10 percent did not return.”

However, Thrall said, after the short-term drop, the housing market bounced back.

“We know from studies on how people respond to hazards that if a hazard occurs three times within seven years, the market will internalize that and respond,” Thrall said. The last time a hurricane hit Louisiana was Hurricane Camille in 1969, which was 36 years ago, Thrall said.

“On that rate, we have three a century. People don’t internalize to hazards that occur with a frequency of three a century,” Thrall explained, meaning that something happening so seldom won’t affect the real estate market.

Should hurricanes become more frequent, this might affect the market, Thrall opined. However, “it won’t be suddenly that there is no value in the land. It might mean that the use of the land may well change. Let’s say you’re on a flood plain that floods once every three years. You’ll build your house on stilts,” Thrall said.

Molony emphasized, “We don’t know. When you look back at comparable events, we don’t see anything that really measures up to the size of this storm in the history of home sales. We didn’t start reporting this until 1982, so we can’t see a direct cause and effect of Hurricane Camille.”

As with Florida in 2004 before the storms, Louisiana, Alabama and Mississippi were experiencing record home sales before Katrina hit.

“In New Orleans, the median home price in the second quarter of 2005 was $152,600. That’s an 11 percent increase over the median home price in the second quarter of 2004, which was $137,500,” said Lawrence Yun, an economist with the National Association of Realtors.

“In Mobile, Ala., in the second quarter of 2005, the median price of a home was $129,100, a 10.5 percent increase over the second quarter of 2004, when it was $116,800,” Yun said. In Gulfport/Biloxi, Miss., the median price of a home in the second quarter of 2005 was $124,000, a 9.6 percent increase over that quarter in 2004, when it was $113,100, Yun said.

If experience is any indication, after the cleanup – predicted by some to take as long as a year – prices might well recover, all other things being equal. Rumors of a housing slowdown have become widespread over the past couple of months, however.

“Generally, after disasters, we have usually found these markets quickly rebound – provided the insurance money is there,” Yun said.

“The loss of a person’s home with all the emotional attachments is obviously something that cannot be replaced,” said Yun, who like all the sources consulted in this story expressed his concern for the survivors of the disaster. “But in terms of economic impact, provided the insurance money is there either privately or with the government, a rebound is likely.”

Yun said building new homes helps the economy. He also said that with federal help from the Federal Emergency Management Agency, or FEMA, and homeowners’ insurance, “it’s likely these states will have the insurance money to rebuild.”

Tony Iorio, vice president of development for Avatar Properties in Orlando, Fla., can attest to the market’s resiliency in the wake of the four hurricanes that pummeled Florida.

Avatar posted a record 1,921 new home sales in its three Orlando-area communities last year – an 18 percent increase over sales in 2003. The growth came despite losing 44 sales days to the three hurricanes that blew through the region in 2004, along with the cleanup and building material and construction labor shortages that followed.

“We did really well despite the hurricanes,” Iorio said. “Some of those areas that are devastated – I’m sure they’ll be coming back. There will be new projects that will be built. They’ll be stronger than ever, hopefully.”

***

Send tips or a Letter to the Editor to janis@inman.com or call (510) 658-9252, ext. 140.