Fires and fallout

Good morning. We've had a few requests for a post on the fires, so here it is. Our first thought is probably yours as well: We're hoping for the best -- minimal loss of life, and minimal damage to property.

Though we are hesitant to go straight into an economic discussion of such a disaster, this is an economic blog and we sense some interest.

Random thoughts: It is possible the fires will cause a slight, temporary change in the supply-demand dynamic in Southern California real estate  -- that is, marginally more demand, marginally less supply. At present there are 157,000 homes for sale in the five counties most affected (Inventory levels from Bubble Markets Inventory Tracking: Riverside, 32,000; Los Angeles, 59,000; San Bernardino, 23,000; Orange, 20,000; San Diego, 23,000).  In those five counties, sales last month totaled 11,800 homes.  Remember, not everyone who loses a home will run out and buy one; and not everyone who loses a home will stay in the area; some of the burning homes are vacant. Another caveat: Throughout the affected areas, the fires will cause a temporary freeze on all home sales activity -- very few people will go to open houses this weekend in the affected areas.

Economic impact: Generally speaking, quick natural disasters cause a short-term increase in economic activity. People flock to Home Depot and Wal-Mart to buy emergency supplies, the government spends a lot of money, insurance claims are paid out, houses and businesses are rebuilt. That said, Gov. Arnold Schwarzenegger is warning that this disaster will cost the state some economic activity.

Big-picture longer term fallout: It's possible the fires will represent a "tipping point" of sorts that will cause governments to pause and reconsider the wisdom of heavy development in dry, fire-prone areas in the Southwest. We consider this unlikely -- central planning and decision-making are not big factors in the American economy.  An event of this magnitude, though, could make it more expensive, and thus less attractive, to build in fire zones -- through higher insurance premiums.

Your thoughts? Insights? E-mail story tips to lalandblog@yahoo.com
Photo Credit: Los Angeles Times

Comments

[brettdl]

I was wondering if you thought the fires might push more people to leave the area and thereby further increase the housing glut in the long run.

[FM71]

Just when the housing inventory goes up and the future starts looking bright for buyers our annual wildfires bring them right back down. Anyone interested in a fire sale? A co-worker of mine thinks that the fires were started by sub-prime borrowers. Hmmmm.......

[Steve]

As seen in New Orleans and Miss nothing will change as far as building. Insurance rates will go up and that is about it. This is an annual event in SoCal with the Santa Ana's and nothing will change. Like the Northridge Quake it will most likely help the economy for a period of time.

[Cal]

I think it would change the local rental dynamic for a time. But would depress housing sales in areas near burned out areas and could be the straw that broke the camels back for the areas immediately surrounded by burned out brush (harder for buyers to imagine themselves in the homes, mudslide worries, fire danger is evident to buyers, etc).

[Rpche]

There are 157,000 homes for sale in those areas. The number of homes burned down doesn't even represent a rounding error.

The economic impact, if any, will not come from supply/demand but rather from an appraisal/financing point of view. If a house has a pile of ashes next door, does it appraise for more or less? Will banks be more or less willing to provide credit to fire-prone areas?

[David]

The fires will probably put more demand on rentals than sales in the affected areas.

People will be looking for short-term leases while their homes are rebuilt from insurance funds. Fortunately, there are many empty homes and condos sitting around for them to choose from, especially down in San Diego. If I were a flipper sitting on empty homes, I'd take it off the market and offer it for short-term (3-6 month) leases, and put them back on the market again for the Spring selling season.

[Pete Viles]

Mike posted this comment on another post, but it belongs here, so I'm reposting:

from Mike: i thought about the fire thing. i think it is going to stimulate some more economy here with home [re]building. i also think that many of these people will take a payout from their insurance and move to the urban areas where devistation is less likely. (you can just get shot more easily). there should be plenty of houses to rent left in the burn areas. shouldn't there? i think all the homeowner insurance premiums will spike and we will ultimatly pay for their burned houses in one way or another.

[are they crazy]

Not sure what the impact will be. It depends on how the insurance plays out. I suspect insurance companies will try to low ball using the declining market as an excuse. Also, I think anyone who is already upside down or heloced to the max is screwed. What I'm most shocked by is all the political discourse comparing this to Katrina, discussing whether people should be living there, and worrying about what this will cost everyone else. America used to be known for how we responded to disaster - just everyone pitching in the help one another and leave the discussion for later. It's a shame what's happened to us - we've lost all sense of humanity and any sense of caring about the greater good.

[Cal]

http://www.bloomberg.com/apps/
news?pid=newsarchive&sid=aIOpZROwhvNI

"Home Insurers' Secret Tactics Cheat Fire Victims, Hike Profits "

"Insurers often pay 30-60 percent of the cost of rebuilding a damaged home -- even when carriers assure homeowners they're fully covered, thousands of complaints with state insurance departments and civil court cases show. "

[Josh]

It will be interesting is to see the fight between the insurance companies and the home owners over how much the home was worth when it burned down considering the current state of the housing market.....let the lawsuits begin!

[Toby]

It's like 1994 all over again.

Fires depresses demand much like ALL natural disasters . Because what it does is remind the potential buyer of the "other" costs in home ownership.

Like regional disaster insurance (here in LA it's earthquake and fire, in Folrida it's Hurricane, in Kansas it's tornado...and so on and so forth).

Again it goes back to that old adage, Just because you can afford the mortgage, doesn't mean you can afford the house.

I've said it here a ton of times--and probably going to say it a ton of times more...

Just wait until an earthquake. A good 5 plus in the city (It's not a matter of IF but WHEN).

Then you will see how low LA property can go. Try .40 to .50 cents on the dollar at current prices. And if it's a 6 plus, .25 to .35 cents on the dollar.

Mark my words. I've been through this sooooo many times before here.

It will happen.

[Toby]

" i think it is going to stimulate some more economy here with home [re]building. i also think that many of these people will take a payout from their insurance and move to the urban areas where devistation is less likely. "

One word: Quackenbush

And even if people do get SOME money, it wont be for at least 5 years. Anything between then and now will be done "out of pocket".

But to think any aid will be done better than, let's say, New Orleans, is just pie in the sky.

Even if you are totally covered and properly insuranced, your insurance company will fight you on EVERY turn. And the said part is...

At BEST, you will only get a franction of what you lost. And you lose all of those old family pictures...

Really, you get victimized twice.

[D]

This really is a horrible, horrible blog to read.

[ProblemWithCaring]

I love this blog.

We didnt start the fire....

[Toby]

This really is a horrible, horrible blog to read.

Posted by: D

No, what's horrible is that we don't have our National Guard here to help us in this disaster.

But this blog isn't about this stupid, horrible, @#$%^%ing war.

It's about real estate economics. And this fire is having a BIG impact on real estate economics (and the risk of home ownership).

I would be SHOCKED if this blog entry wasn't here.

[investorguy]

Toby: you're an idiot. RE rebounded fast from Northridge.

[Tex]

I'm surprised nobody's commented yet on the LA Times story about the first-time homebuyers who are defying evacuation orders and staying behind to protect their house.

http://www.latimes.com/news/local/la-me-
standoff23oct23,0,1933928.story

Losing your house is rough, but these folks need to get their priorities straight...

I think that all of these fires will speed the decrease in housing prices. I doubt people who lost everything and who are fighting with insurance companies to recover a small fraction of their loss are going to be in a position financially to play inflated prices for new homes.

[ProblemWithCaring]

inverstorguy is baaaaack! woohoo!

Finally! a break from the mundane sort of lunacy that is AnnS interpreting clearly written posts through foggy geriatric glasses of curmudgeonliness and Kim’s pretty tired racist-shtick - to get back to plain old, salt-of-the-earth blog trolling.

I wonder if we can thank his getting the Fannie Mae re-fi from Countrywide (on some of those flips for which he's claiming primary residency) - for his return?

[mike]

toby convienantly omitted the part of my blog that says we will all ultimatly pay for this damage through higher premiums.

do you know what omitted means toby?...........or did you just leave that part out

[mike]

i got some good deals after the earthquake. just go spend one winter in north dakota and you will see why people pay the price of a mortgage just to rent here. a lot more people perish from freezing than burning or shaking to death.

p.s. toby...you are a fool

[Anonymous]

Investorguy --

It is odd that you are so successful yet still feel the need to hurl epithets at those who disagree with you. Maybe not odd, but certainly sad.

You appear to represent the classic paradigm of the overconfident, undereducated investor. You believe that because you have seen 1000 white swans that you can prove that no black swans exist.

It is foolish to think that your investments are immune to major disasters or negative macroeconomic developments. Maybe you didn't live through the Great Depression, but still, all the data will show you that a lot of people lost a lot of money in real estate during that era. If you think a very large earthquake (say 7.5 or 8) centered in the LA basin wouldn't be catastrophic for local real estate values, you are almost certainly mistaken. If a nuclear weapon exploded in midtown Manhattan, our entire economy and all of your real estate investments across the country would fall off a cliff, I can assure you.

A whole host of lifelong real estate developers (me included) know that real estate markets are prone to boom and bust, and you don't have to be a 'whiner' to understand this. It is a natural cycle driven by the need for those employed in the industry to find any way (fraud included) to keep making money until everything is overvalued and the bubble pops. We are almost certainly entering the bust part of the cycle. I doubt values will fall 40%, but then again, if there is a black swan event, they may fall much more than 40%.

By the way, you should also consider that, in any event, the stock markets have handily beaten (in real dollar terms) most real estate investments during most periods of this country's history; this unfortunate fact tempers me from trumpeting my own successes in real estate.

Facts and logic are not your exclusive domain. In fact, they often seem to bypass you entirely if your posts are any indication. You ought to consider the limits of your own knowledge before posting again. Perhaps pick up a book on epistemology instead. It couldn't hurt.

[investorguy]

Aw shucks, Problem... no such luck, sport. I've been busy making money. What have you been up to?

Mike: no shit. I spent three years in ND.

[AnnS]

"AnnS interpreting clearly written posts through foggy geriatric glasses of curmudgeonliness
Posted by: ProblemWithCaring

And you are a complete MORON!! Let's see what did you object to?

(1) The breakdown of the economic demographics of LA county and comparison to the current lending standards of 20% down and the old 28/36 ratios in terms of the buyer market profile?

(2) The explanation that bankruptcy impairs the ability to get credit at favorable rates?

(3) The explanation of how the affordable housing programs operated through the ageis of the State Housing Authorities and HUD work

Or are you just a worthless misogynistic fool who hates it when women know more about numbers, economics and law than you, eh? (And I am properly younger than you since we got to retire very very early – you can do that when you have lots and lots of advanced degrees from prestigious schools.)

Hey Peter, what happened to your rule about not allowing personal attacks and insults in posts ? What, is this nitwit ProblemWithCaring your cousin or something?

He/she/it certainly never has substantive info to add to any discussion - just rudeness.

On the subject of what an insurer will or will not pay for a house that was destroyed, forget "market value." What a house may or may not sell for on a given day has nothing to do with what it is insured for or how much the insurer will pay.

Policies are written basically one of 2 ways:

(1) The property is insured for a fixed amount - generally what you paid for it on the day you bought it. If it goes up in value or in replacement cost, it was up to the honeowner to contact their insurance agent and raise the amount for which it is insured. (And no, insurers do check on how much you want to insure for versus the number it would take to rebuild it or buy a similar home. They aren't going to let you insure that 2 bdr/1 bath 700 sq ft house for $ 4 million.) If the homeowner had a fixed coverage policy for a definti amount - $100,000, $275,000, etc - that is the maximum the insurer will pay regardless of whether it will take 3 times that to replace the house because of an increase in construction costs or materials. If the homeowner didn't keep the coverage amount current with what it would take to rebuild, that is their problem to come up with the difference.

(2) The other is "replacement cost" which can be insured 2 ways.
(a) When the home is purchased, it is insured for the estimated amount that it would take to replace it. Typically this is done by a simplistic multiplying the sq ft by a number (nationally insurers are fond of using $100 - 200 per sq ft as an estimator.) Again, it is up to the homeowner to increase the amount of coverage if replacement costs go up or they add a few thousand in improvements. This method is typically used with older homes to arrive at a replacement cost separate from the land.
(b) Straight replacement usually written as “insured for $XXXX or the actual cost of replacing the structure.” While that is the best policy from a consumer point of view since they don’t have to keep increasing coverage and hoping their guess was right, it is also the most open to future fights with the insurance company. Homeowner defines “tile” as hand painted tiles at $50 apiece and the insurer defines “tile” as generic at $5 each from the discount lumberyard. Homeowner claims that the tiles in the house that burned were the $50 per kind, the insurer says “prove it” and the homeowner doesn’t have the receipts for the tile or even know who installed them since they were there when he bought the place. – and, of course, there are no pictures of videos of the house.

[Larry Kaplan]

The real estate market collapsed in the early to mid 90's because the economy tanked and the region had been overbuilt in the late 80's and early 90's. The earthquake and riots were not significant events in terms of real estate values, although they were very important for many other reasons.

[marycrobinson]

I watched canyon fires in the 70's and houses were not burned because people were smart enough not to build in areas that were notorious for semi annual fires!! Now with all the extra homes and landscaping the fires have more fuel to make a bigger problem!! People who build in the same area will get the same result - THINK it through!!!!