How Natural Disasters Impact Real Estate Prices

How natural disaster can have an impact on local real estate is important to understand as a homeowner

It’s often something you don’t think about until it happens. But understanding how natural disasters impact real estate prices is important for homeowners. When a natural disaster strikes, the first and foremost priority is protecting individual lives, as it should be. But what do these catastrophes mean from an economic perspective, particularly when it comes to real estate?

A 2015 report by RealtyTrac found up to 43% of homes and condos in the United States to be at high risk or very high risk of at least one type of natural disaster. This percentage accounts for a total of 35.8 million homes across the country, with an estimated market value of a whopping $6.6 trillion.

Of all the states with homes that are at high risk, California tops the list. A total of 8.4 million homes are deemed to be at a high risk should there be a natural disaster in the Golden State, compared to runner up Florida’s 6.7 million homes at similar risk levels.

A Local Phenomenon

How natural disasters impact real estate prices is certainly a local phenomenon rather than a nationwide trend. But the effects are very noticeable in that particular area, if only for a short time. Prospective buyers may lose confidence in their desired location, and mortgage operations can be slow, both of which hurt home sales. Data suggests that there is a slower rate of increase in home sale prices in higher risk areas. While low and very low risk areas experience average price increases at 6.6% and 9.5% respectively from 2005 to 2015, high risk and very high risk areas have seen prices decrease by 2.5% and 6.4% respectively in the same decade.

Despite this, however, how natural disasters impact real estate becomes different story when it comes to home value. Paradoxically, home values in high risk areas tend to be higher than in low risk areas. While they may not grow as fast, the starting point is much higher.

Home Values

Homes in very high risk counties were found to have an approximate average market value of $170,237, while homes in high risk counties had an approximate average market value of $191,244. Compare this to the lower risk areas, in which the average home value of a property in a low risk area was $154,464, versus an average approximate property value of $151,793 for a home in a very low risk area.

In the past three years, home price appreciation has been stronger in high risk counties than in lower risk ones. Home prices saw a 16.6% increase in high risk areas between 2012 and 2015, and a 20.4% increase in counties labeled as being Very High risk. Compare this to the low risk areas, where home prices increased by an average 10.1% over the past three years, or the very low risk areas which saw an average increase in home prices of 12.8% over the same time period. These trends can potentially be due to the fact that markets in high risk areas change more rapidly than others. Also, the recovery from the housing crisis has been stronger in high risk areas.

How Natural Disasters Impact Real Estate

So, what does all this mean in terms of how natural disasters impact real estate? It suggests that other factors, such as generally good weather and proximity to employment opportunities, weigh more heavily in the decision making process for prospective buyers than do the risk of natural disasters. And in many cases, while devastating at the time, a natural disaster often does not have a long lasting impact on the real estate market. This we can derive from the Loma Prieta earthquake of 1989.

A Deadly Quake

Almost exactly 27 years ago to the day, a 6.9 magnitude earthquake rocked Northern California. It ended up  leaving 63 people dead, destroying over 11,000 homes and creating roughly $6 billion in damages. Immediately following the quake, nervous buyers began to back out of real estate deals. The result? Making it impossible for lenders to process loans, and bringing mortgage operations to a grinding halt. People were fearful of the long-term threat of earthquakes in the region. In the following months, sellers began to pull their homes off the market in order to get a better sense of the situation. The greater number of days a house is on the market, the less leverage the seller has. People begin to question why the property hasn’t sold more quickly.

The Impact

Most of the properties in the San Jose area weren’t significantly damaged. The quake left hairline cracks in stucco or the concrete of a driveway in many cases. Only a few older homes in San Francisco experienced devastating damage. Most of these were properties between 80 and 100 years old. This meant that some homes were simply damaged beyond repair. Even if the buyers were still interested, lenders would not lend the necessary funds to facilitate a transaction. In other cases, buyers were willing to wait for damages to be repaired before continuing with their purchase.

As time went on, sellers started putting their homes back on the market again. Prices were relatively similar to what they had been prior to the earthquake. Some studies indicate small decreases in home values correspond to the disaster. But the economic conditions of the early 1990s had a far more significant impact on the property market. After a brief slow down, the real estate market was quick to return back to normal following the earthquake.

Risky Real Estate

Many are willing to forgo the risk of natural disasters to live in California, likely due to its natural beauty. It may be the highest risk area in the United States for earthquakes, But California also boasts some of the most striking scenery in the country, which takes precedence in minds of thousands of homebuyers.

No Surprises

But according to RealtyTrac vice president Daren Blomquist, how natural disasters impact real estate shouldn’t come as a surprise to prospective homeowners. Since information is so readily available, buyers don’t have much of an excuse nowadays to be unaware. While knowledge of a disaster risk most likely won’t stop a home sale, at least buyers will be able to make sound decision on where and what type of home to buy. (For example, in Ohio, tornados are prevalent. Many homebuyers there opt to only view properties with basements. These types of homes are at less risk of damage by a tornado).

It is also important for homeowners to understand the specific insurance coverage they should be looking into. A good realtor should be able to advise buyers on how natural disasters impact real estate prices and the home they are looking at.

Odds of Another Earthquake in the Bay Area

Even with information being easily accessible, only about 10% of California homeowners have earthquake coverage as part of their insurance plan. This is despite the fact that California is a perfect example of a place that shows how natural disaster can impact real estate. Within the next 30 years, scientists predict a 68% chance of the Bay Area experiencing a 7.0 magnitude earthquake. Unlike in Florida, where hurricane insurance is often mandatory, in California, earthquake insurance is optional.

Unaffordable Insurance

For the majority of homeowners, the earthquake of 1989 is within living memory. But with insurance premiums continually on the rise, coverage becomes increasingly more unaffordable. Since earthquake insurance premiums consist of a combination of home replacement value and proximity to a high-risk fault. Northern California has some of the most expensive real estate in the country, in an earthquake hotspot. So, it’s no surprise that affordable earthquake coverage is becoming increasingly more difficult to find.

Seismic Investments

Some argue that a good solution is investing in your home seismically. Rather than spend money on hefty premiums, it may be more economically viable to do what you can to make sure that your home is structurally sound. This includes reinforcing walls and the house’s foundation. It will also make your home ready for a future sale. In state of California it is mandatory to fill out a checklist when selling your property. This highlights whether earthquake strengthening measures have been implemented in your home.

Throughout the United States, properties that are at the highest risk of experiencing a natural disaster are predominantly along the coastlines…along with some of the country’s most picturesque settings. It’s no surprise that homebuyers flock to these beautiful regions. Despite the risks and impact on the local real estate market when disaster strikes, the economic climate does, in most cases, have a greater impact on the real estate market in these areas than natural disasters do.

Like with all matters when it comes to selling or buying a home, being fully aware of any risks is important. A good realtor will be able to educate clients about how natural disasters impact real estate prices in their area.

 

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