October 2007

Natural Disasters and the Housing Market
By Robert A. Kleinhenz, Ph.D., Deputy Chief Economist

From time to time, natural disasters wreak havoc on the state of California. The full force of a hurricane such as Katrina rarely if ever reaches California's shoreline, but we have had our share of disasters in the form of earthquakes, droughts, mudslides, and most recently, wildfires. So the question is, how will the Southern California wildfires of October 2007 affect an already weakened housing market?

The October wildfires occurred in the midst of a multi-year drought. Most of the Southern California region had received less than 5 inches of rainfall over the previous 12 months, so conditions were extremely dry. At one point in time, firefighters were battling upwards of 18 fires in low humidity and temperatures in the 80s and 90s. A week into the fires, 518,419 acres had been burned and 2,007 homes had been destroyed in fires that ranged across 6 counties, including Ventura, Los Angeles, San Bernardino, Riverside, Orange, and San Diego. Fires had been contained but not yet fully extinguished.

As impressive as these numbers appear, they accounted for a relatively small share of the region's total area and number of homes. In terms of physical size, the six counties span about a quarter of California's total area and amount to approximately 40,000 square miles or 24.5 million acres. This is about the same size as Kentucky or Ohio and larger than 14 other states. However, the six-county region is home to 21 million residents, a population that roughly matches that of Texas and exceeds that of all other states in the country. It is no surprise, then, that the fires created so much concern to so many.

The total acreage burned in the October 2007 wildfires corresponded to just over 2 percent of the region's total acreage, while the number of homes destroyed added up to about 3 in 10,000 homes relative to the region's 7.2 million dwellings. In fact, the 2003 fires were considerably worse, with 750,000 acres or 3 percent of the region's total acreage burned and 3,500 homes or 5 in 10,000 homes lost.

Needless to say, the most serious loss associated with disasters is the loss of human life. As of this writing, there were seven deaths associated with the fires. Many of the affected households lost irreplaceable items such as family heirlooms, photographs, and similar objects. As for the damage that can be assigned a dollar value, the Insurance Information Network of California has estimated that claims from the fires will likely top $1 billion.

All in all, disasters such as the wildfires generally cause a temporary slowdown in both general economic and housing market activity that is of limited duration and geographic impact. Many aspects of market activity take a hit, from reduced traffic at open houses to fewer closed escrows as insurance companies are slow to write insurance policies on homes in the affected areas. Rising from the ashes as it were, insurance claims will eventually spur an increase in construction activity as damaged homes are restored and those that have been destroyed are rebuilt.

To learn more about our Trends Newsletter, please contact the Research & Economics Department at  research@car.org or (213) 739-8352.