Housing market affected by natural disasters

Market slowed to a crawl by Hurricane Katrina

The housing market has its ups and downs and a number of factors come into play regarding whether there is a boom or a bust in the market. When new jobs become available, people move in and prices rise. When a company goes out of business, the opposite happens, with “for sale” signs dotting the landscape.

And when natural disaster occurs, all manner of things can go wrong with the market. Hurricane Katrina devastated the New Orleans area in 2005 and the housing market may take years to recover. Current sales are about one quarter of what they were last year, even though you would think that the market would be good. There are many people who no longer have homes and there are fewer homes to sell. This would suggest a seller’s market, but sales are slow. Why is this?

The problems are many and there is no simple solution to any of them:

Property insurance problems - When disaster strikes, property insurers get skittish. The cost of this disaster is measured in the billions, and the insurers aren’t sure yet how much they will have to adjust their rates in the future to insure that the premiums will both cover their risks and provide an adequate profit. As such, most insurance companies have stopped writing homeowner’s policies in the New Orleans area. If you cannot get insurance for your home, you cannot get a loan, as no lender will provide money for property that cannot be insured. This particularly applies when that property is in a proven flood zone that lies below sea level, as does most of New Orleans.

Appraisal problems - In order to adequately determine the value of a house for lending purposes, lenders need to know the value of other houses in the neighborhood that have been recently sold. In the New Orleans area, many homes are badly damaged, some are gone altogether, and few have been sold recently. The entire city has, in effect, had it’s market wiped out; there are no properties with which to make comparisons. If a lender cannot adequately determine the value of a piece of property, a loan is unlikely.

Property damage and other factors - Most lenders are not interested in lending money for property that is not ready for immediate occupancy. That can be a problem in a city where most homes have at least some damage that needs repair. Additional problems involve infrastructure, such as gas, fire, sewer and water. The city is still a mess and it isn’t possible in many areas for people to just move in and live what is considered to be a “normal” life. If these requirements aren’t met, lenders tend to stay away.

Hurricane Katrina is just one example of what can happen to a housing market when a natural disaster strikes. The entire process is subject to upheaval and the problem could take years to resolve as the city decides how, when, and where to rebuild and while the insurance companies take a “wait and see” attitude to decide how much to charge property owners in that market, or whether to do business in that market at all. For residents, it continues to be a tough time.