National trends provide some answers, but every local market is different.

By Mark Melikian

Predicting real estate prices can be like predicting the weather. We can analyze all the major national trends, see where the cold and warm fronts are moving, and guess what the impacts will be for the local markets, but we can never be 100 percent sure.

The same is true for real estate. National macroeconomic trends definitely impact local markets, but each neighborhood is different. Some are better protected from trends that might negatively impact others. Prices in one market can react quite differently than in another, even when the macro-economic trends impacting them are the same. As any broker will tell you, when it comes to real estate, every local market is different.

The one time this may not be as true is when major weather patterns impact regional real estate markets. There are no weather patterns more major, at least in our hemisphere, than the Atlantic hurricane.

The season, which began June 1, 2017, started rather weak with a series of smaller storms that gave many a false sense that the season would end without any dangerous weather. The Tropical Storm Risk (TSR) Consortium at the University College London wasn’t as certain. Its preseason outlook, which it issued December 2016, called for 14 named storms, six hurricanes and three major hurricanes.

Since the season began, we’ve had seven named storms and seven hurricanes, a Category 1, two Category 2s, one Category 3, two Category 4s and two massive Category 5 hurricanes, Irma and Maria. Irma was among the strongest hurricanes ever recorded outside the Caribbean Sea and the Gulf of Mexico. It smashed into the Florida Keys as a weakened version due to its impact with Cuba. Two weeks later, Maria surpassed Irma to become the most intense hurricane of the season by central pressure, but was later reduced to a tropical storm.

A Category 5 hurricane is a very dangerous storm, but the hurricane that devastated the most real estate so far into the season was the Category 4 storm Harvey. It was the costliest storm of the season, doing approximately $190 billion in damage. It was the first major hurricane to come ashore in the U.S. since Hurricane Wilma in 2005.

Hurricane Harvey did more damage than hurricanes Katrina and Sandy combined. In the process, it destroyed the lives of the thousands of people it left in its wake, even those who were insured. Its impact on the value of the land itself is not likely to be extreme, however, at least not in the long term. There are a number of reasons this is true.

INSURANCE AND GOVERNMENT FUNDS WILL BE LEVERAGED TO REBUILD

According to Reuters, the insured damage Harvey caused will run just north of $20 billion, making it one of the 10 costliest storms ever to hit the U.S. As you would expect, this has already taken a toll on insurance company stocks, but this loss is not large enough to threaten that industry.

Insurance will fund the rebuilding of many impacted neighborhoods, with flood insurance providing up to $250,000 in rebuilding costs and more money on top of that to replace belongings. When the new homes are complete, they will have the benefits of current construction technologies, and in time could be more valuable than the existing homes would have been under the same circumstances.

Unfortunately, most of this insurance coverage will support rebuilding of commercial and multifamily dwellings. Normal residential hazard insurance, the kind most people are required to buy when they take out a mortgage, doesn’t cover this type of event.

In fact, according to The Washington Post, less than 20 percent of the homeowners living in the eight counties most directly affected by Harvey had flood insurance coverage. That result came from the Post’s analysis of Federal Emergency Management Agency (FEMA) data.

The rest of the homeowners will rely on the government for support or be forced to use bankruptcy law to protect themselves from mortgages on homes that no longer exist. Fortunately, there is aid available. Federal grants for disaster victims can be used for temporary housing or emergency home repairs, and other aid could also be available, including rental payments and grants to replace personal property. Government efforts that will have the most impact on future property values are its grants to make damaged dwellings safe, sanitary and functional and its low-interest loans.

Not everyone will stay, but if they choose to rebuild, there are resources available to help them do so.

AMERICANS ARE READY TO HELP VICTIMS GET BACK ON THEIR FEET

For some, rebuilding will require a more hands-on approach. They will pick themselves up, as they always do, and begin to clean up and reconstruct their lives. But they won’t be alone. With each new disaster, Americans seem more willing to offer a helping hand, and a check.

It may be social media’s impact or the fact that the media and high-profile stars step up to draw more attention to these disasters, but consumers and businesses are stepping up to help out. As of the end of August, American businesses had pledged more than $157 million to relief efforts, according to CNN. Sixty-nine of those companies had donated $1 million or more.

Meanwhile, nonprofit organizations like The Red Cross and Samaritan’s Purse are sending in relief workers to help with the cleanup and prepare the ground for new construction, now that the floodwaters have receded. These are being added to the ranks of construction industry workers that have descended on the area.

At the time of publication, we still didn’t have a good idea of the total amount of financial and other aid donated to support victims of Hurricane Harvey, but the final tally will be in the
hundreds of millions.

Even so, there can be no doubt that some residents will leave. Many of those who never expected a hurricane to make landfall and blow away their homes and personal items will not face the same risk again. But for every person who moves away from the water, many more are waiting to take their place. It’s the single biggest reason property values rebound in the wake of every major storm.

WHY FLOOD-PRONE PROPERTIES WILL ALWAYS HOLD THEIR VALUE

The last time we wrote about the impact of natural disasters on property values, we were considering the potential impact of the Zika virus on property values in Florida. We predicted that any negative impacts would be short-lived, and it appears there were few impacts at all. Nevertheless, it is important to ask these questions, especially if we are in the real estate business.

There can be no doubt that flooding will have a short-term impact on the price of real estate, but how severe it will be and how long it will last are difficult to estimate. The research indicates there is no norm and that a storm that does a great deal of damage can have a very short-term negative impact in real estate values in one community, while the impact could last longer elsewhere. This is the local nature of real estate again.

What can we say with certainty? North Texas real estate pro Candy Evans did a nice job on an analysis she published on her blog, CandysDirt.com. Her research indicates that property values will fall from 10 to 30 percent in the wake of a major storm, but the effect will not be permanent. This fits well with my experience.

How long will it take for prices to recover? That varies as well, but it could take a while. It could be eight years or more for some storms. Some properties destroyed by Katrina still haven’t been rebuilt. But if the property is within a short distance of water, it will very likely be rebuilt. It’s human nature to seek out water, and we feel better when we live in close proximity to it.

Neuroscientist Michael Crawford of the University of North London has suggested “that our ancient ancestors were devotees of the sea, and that their devotion paid off by allowing the human species to develop large and complex brains.” His ideas were shared by Meredith F. Small, an anthropologist from Cornell University, who was pondering online why she felt so good during a seaside vacation.

It’s not just academics who realize that property with an ocean view is intrinsically more valuable to humans. Any study of real estate will show that the more expensive properties, when the structure of the house and other variables are comparable, will be those closer to water.

THE BOTTOM LINE FOR REAL ESTATE INVESTORS

What does all this mean for private lenders? From my perspective—and as long as you don’t take this as advice since the specifics of each real estate transaction differ—it may mean that if you’re looking to lend in areas where properties are likely to appreciate greater than the overall market in a decade or less, consider lending in communities that have fallen prey to recent hurricanes. In addition, you will have many borrowers to choose from and the possibility that the homeowner could also tap some government aid.

Like every real estate deal you invest in, underwrite carefully. However, this is one time when it may be profitable to run toward trouble when everyone else is running away from it.

About the Author: Mark Melikian is chief valuation officer for Summit Valuations, where he oversees the performance and training of the quality assurance team, product development, and is the company’s valuation expert. He can be reached at mark.melikian@summitvaluations.com.