As storms and disasters such as fires increase in severity, strength, and damage, it is important for lenders and servicers to know that they don’t only impact lives and property. Costly disasters also impact the area’s, state, and national economies in some very bad way. It’s obvious that the personal losses are devastating for those affected directly as well as the fear of the ‘next one’ for those that live in the potential path of such tragedies. The devastating wildfires in Los Angeles have caused evacuations and fatalities and have destroyed well over 10,000 structures and already ranks as one of the, if not the, costliest fires in U.S. history. These wildfires are certain to have a substantial impact on the Los Angeles real estate market now and for years to come. This in turn impacts lenders, employees of lenders, and servicers.
Hurricanes are not unusual in the Southeast and Gulf States. Wildfires are not unusual for the state of California, which has endured thousands of major fires over the course of its history. Aside from burned acreage, most brought relatively little harm since they occurred in sparsely populated areas. Recently, however, several wildfires have caused immense destruction. In 2018, the Camp fire in Northern California burned over 153,000 acres, damaged approximately 18,800 structures, and resulted in 85 deaths, making it the most destructive wildfire in California’s history.
CoreLogic estimates insured property losses to range between $35 and $45 billion in Los Angeles County. This projection is significantly higher than the $12 billion incurred after the Camp fire in 2018 and would put the insured property losses on par with Hurricane Ida and Hurricane Sandy. Servicers and lenders keep a sharp watch on the total economic losses–including potential direct losses from destroyed property as well as indirect losses from business interruptions, lost wages, healthcare costs and environmental damage–which stand to be significantly higher, potentially exceeding Hurricane Katrina.
The LA wildfires will have a substantial impact on the Los Angeles real estate market. According to CoreLogic, over 16,000 structures lie within the incident perimeter, the majority of which are residential properties. Roughly half of these impacted residential properties are estimated to have been destroyed, with the remaining structures likely uninhabitable for the foreseeable future.
The fires burnt LA neighborhoods where home values are well above the national average. According to Zillow, the average home value is currently $3.4 million in the Pacific Palisades and $1.3 million in Altadena. The local commercial real estate market also has been affected.
A recurring theme that I hear in my travels around the United States is the lack of inventory for sale, especially at certain price points. Events like the flooding in the Southeast and Hawai’i, and Los Angeles fires negatively impact housing stock, although the residential units within the fire perimeter only comprise about 1% of the total Los Angeles housing stock. But shocks from the wildfires are certain to reverberate through the Los Angeles housing ecosystem, on the purchase and rental side.
Displaced residents will need to find housing in other parts of the metro area, whether it be in a hotel, apartment, or single-family home, or move to distant locations if their jobs allow it. The scarcity of supply amid a surge in demand will very likely result in higher housing rent throughout the region. For example, in 2005, Hurricane Katrina destroyed an estimated 300,000 residential properties and resulted in 1.5 million displaced residents. Rent initially declined as much of the New Orleans population was forced to evacuate, but as the recovery picked up steam the residents who eventually returned faced a decimated housing stock and substantially higher apartment rents. Los Angeles is the second largest metro area in the nation and the count of affected properties and residents is smaller, so the overall impact, we hope, should not be as acute.
With reconstruction ahead, property owners will face significantly higher construction costs thanks to pronounced building material and labor cost inflation in recent years. Rising construction costs are one of the factors behind the rapid increase in homeowner insurance premiums over the past few years, increases which have bumped up against the state’s consumer-friendly insurance regulations. As a result, many insurers have been dialing back or dropping coverage entirely, and the recent fires are likely to strain the local insurance market even further. For loan officers helping borrowers, initial discussions have changed to certainly include, “Have you spoken to an insurance agent?”
From an overall economic perspective, higher interest rates have slowed hiring in LA’s growing tech and life sciences industry, as well as the manufacturing, freight, and logistics sectors. Consequently, the Los Angles unemployment rate has been steadily drifting higher over the past year. The jobless rate stood at 5.5% in November 2024, up from a 4.9% rate a year ago and a percentage point above the national average. There are temporary effects on local employment, and initial jobless claims in California shot higher due to an increase in the number of residents unable to work. The disaster might lead to a localized drop in home prices and wealth if residents leave Pasadena and the Palisades. At the same time, the disaster may serve to worsen housing affordability in other areas of the region and exacerbate population outflows.
When you are in a numbers business such as ‘mortgage’, you also look at the numbers.
In 2016, after a particular set of hurricanes hit Texas and Florida., Elliot F. Eisenberg, Ph.D., wrote, “The destruction of private wealth and public infrastructure caused by Hurricanes Harvey and Irma are roughly $200 billion. The impact on GDP growth will critically depend on how fast refineries in Houston and tourism in Florida recover, along with how much insurance money and government disaster assistance arrives. 2017’s Q3 GDP will be three-quarters of one percent lower, with compensating boosts in later quarters. The long run effects will be zero.”
And again. “Uninsured losses from Hurricane Ian probably total $40-$50 billion including infrastructure damage and cleanup costs. Insured losses are another $65 billion. Lost wages and corporate profits due to closed airports and destroyed facilities probably add another $15-$20 billion in Florida with minimal losses elsewhere. As GDP ignores wealth losses, it will knock 22H2 FL GDP by 4%, national 22H2 GDP by 0.2%. But the recovery will boost GDP in 2023.”
Obviously, the toll on families certainly does not ‘feel’ like zero, and even if there is an opportunity to rebuild, it will not change how devastating the outcome was even when it’s reversed by rebuilding. Meanwhile, companies servicing large blocks of loans have rolled out forbearance measures to support affected borrowers, and insurance adjusters and their insurance regulators are kicking into gear to handle the big demand on the insurance companies.
Lenders and servicers should know, however, that the area should have a full economic recovery, although none of this will happen overnight. Wells Fargo’s economics team reminds us that Los Angeles remains a premier destination for global capital, a status which should help foster a rebound as federal government aid arrives and the rebuilding effort s get underway. It is still the epicenter of the entertainment business, and the Port of Los Angeles recently announced that 2024 was the second busiest year on record, a timely reminder that Los Angeles is a key node in the U.S. supply chain and international trade network. Los Angeles will host the 2026 FIFA World Cup and the 2028 Olympic and Paralympic games, which will help spur tourism and provide a major boost to the local economy.
So while we show our concern for those affected by the tragedy, we also hold hope that the area will be resilient and have growth and prosperity in the future.
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