Large Regional Housing Markets Can Withstand Huge Storms
The 2017 Atlantic hurricane season will be one of the most active on record. So far, 13 tropical storms have been named and seven of them have grown into hurricanes. Unfortunately, three of those hurricanes – Harvey, Irma and Maria – made landfall in the U.S., causing extensive damage in Texas, Florida, Puerto Rico and the U.S. Virgin Islands. It is likely that the 2017 season will be the costliest in U.S. history due to the intensity of these hurricanes and the relatively large number of locations that fell in their paths. Damage to houses, resulting from both flooding and extreme wind speeds, will make up a substantial proportion of these costs. But if the history of previous catastrophic hurricanes is a guide, then the 2017 hurricanes will not reduce home values. In fact, home prices usually jump upward, at least in the short term, in areas that have been damaged by major hurricanes.
Until now, the three most costly hurricanes in U.S. history have been Katrina in 2005, Sandy in 2012 and Andrew in 1992 (see Figure 1). Following Sandy and Andrew, home prices followed similar paths, as can be seen in Figures 2 and 3. In these charts, home price changes in hurricane-damaged regions are compared against changes for the Census divisions in which the regions are located. The Census division data provides a benchmark to evaluate the relative strength of home price appreciation in damaged regions before and after the hurricanes.
In the Miami metro area and coastal New Jersey and New York regions, home price appreciation dropped relative to the Census division during the first few months after Andrew and Sandy struck. These price dips were caused by temporary declines in housing demand as households in the region focused their energy on rebuilding and helping their neighbors, while any households thinking about moving into the region waited to see if the hurricane damage would have long-lasting economic effects. In both regions, however, the damage to residential properties created an immediate shortage of vacant housing, which resulted in very strong home price appreciation during the six- to 24-month period following hurricane landfall. Price appreciation in the Miami metro outpaced the South Atlantic division’s by 2.5 percentage points per year, while coastal New Jersey and New York prices grew 3.2 percentage points faster than those in the Middle Atlantic division.
Price appreciation in the New Orleans metro area followed a more complicated path following Katrina (Figure 4), primarily because that hurricane created far more damage relative to the size of the local economy. Price appreciation slowed in New Orleans immediately after the hurricane, but accelerated sharply afterwards because so many houses were destroyed (i.e., a steep reduction in supply). In the first six months after Katrina’s landfall, home prices were rising 18 percent annually. But one year after Katrina, New Orleans price appreciation fell behind the West South Central division’s. The National Oceanic and Atmospheric Administration estimates that Katrina caused $160 billion in economic damages (2017 dollars), which represents three times New Orleans’ annual personal income. This huge economic blow, plus the devastation to many neighborhoods, forced thousands of people (an estimated 350,000) to leave New Orleans between 2005 and 2006. Although the New Orleans economy and housing markets have rebounded since 2006, the metro area population in 2016 was still 8.5 percent below its 2005 peak.
These historical examples illustrate how the ability of a region’s housing market to recover from a hurricane depends on the size of the storm (in terms of economic damage) relative to the size of the regional economy. The cost of Katrina was approximately three times annual metro area income, while the damages from Andrew and Sandy were equal to approximately one-third and 14 percent of local regional income, respectively. As we try to predict the effect that the 2017 hurricanes will have on housing markets in coastal Texas, Florida, Puerto Rico and the U.S. Virgin Islands, we should keep the size of their local economies in mind. Although Harvey and Irma were extremely damaging and thousands of homes were destroyed, the large Texas and Florida economies will be able to absorb the economic costs of these hurricanes. Home price appreciation may slow temporarily in these two regions as people dig out from the storms, but will likely jump above trend until destroyed housing stocks can be replaced. The housing market recoveries for Puerto Rico and the U.S. Virgin Islands will be much more difficult. In terms of personal income, Puerto Rico is about the same size as New Orleans, while the U.S. Virgin Islands is 3 percent as big – and both were hit by hurricanes that were more powerful at landfall than Katrina.
- The coastal New Jersey and New York region consists of the following counties: Atlantic, NJ; Cape May, NJ; Monmouth, NJ; Ocean, NJ; Kings, NY; Nassau, NY; Queens, NY; Richmond, NY and Suffolk, NY. This region’s home price appreciation estimates are based on housing stock-weighted averages of the Case-Shiller home price indexes for each county.
- NOAA’s damage estimates for Katrina include areas outside of the New Orleans metro area, so this number somewhat overstates the costs relative to income.
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