Real Estate News

The Natural Disaster Stimulus Plan


Can a natural disaster be a good thing?

The Red River waters that blanketed Fargo, N.D., and Moorhead, Minn., neighborhoods this week caused immediate destruction, despair, and economic devastation, but the surge of spending in coming years to repair and rebuild roads, sewers, homes, and businesses might be a long-term lift to the local economy.

Fargo and Moorhead, which were hit by a blizzard on the heels of the flood, are now assessing the damage and the possibility that the river will swell again after the snow melts. But if the federal aid and private spending pumped into other communities hit by previous natural disasters are a guide, the flood could be an economic stimulus.

"It's a perverse kind of benefit," says Barton Smith, an economist at the University of Houston. "You do have to recognize it's a mixed blessing. If your home survived and you're working in the construction industry, you probably come out of it better. If your home didn't survive, then you're suffering."

The equation, of course, isn't simple and depends on the variables for a given disaster. A community hit by frequent floods could be stigmatized, and residents and businesses will be reluctant to settle there, Smith says.

When Floods Keep Coming Back

The Meyerland community in southwest Houston never fully recovered from a series of floods in the late 1970s and early 1980s, he says. The real estate market rebounded quickly from the first two floods. But after the third flood, residents began to question whether the government's flood protection projects would ever work. "After the third flood, the stigma lasted forever," says Smith.

Another issue with floods, unlike hurricanes, is that flooding isn't typically covered by homeowner's insurance. Despite the fact that the Red River flooded as recently as 1997, only a tiny fraction of homeowners in the Fargo-Moorhead communities had flood insurance.

Still, infrastructure projects after a disaster can create jobs, sometimes at precisely the time they're needed.

In New Orleans, four years after Hurricane Katrina, the recovery effort has helped to bolster the local economy at a time when the nation is in a serious recession.

Unemployment in New Orleans was 5.3% in February, and the metro area grew by 700 nonfarm jobs in February over January. And home prices fell only 3% last month compared with a year earlier.

Gradual Rebound

New Orleans is experiencing a construction boom, fed by federal incentives, insurance money, and private investment. But the boom is happening throughout the state. Baton Rouge, in particular, has benefited from the influx of New Orleans-area residents after Katrina. Louisiana has some added recession protections: its strong energy sector and the fact the housing market wasn't artificially inflated with risky loans, the way other markets were.

But New Orleans has a long way to go. Before Katrina, the New Orleans metro area had 620,000 jobs; that dropped to 426,000 after the hurricane. It now stands at about 526,000. Some flood-prone areas might never recover because of safety concerns.

Randy Noel, who owns Reve, a custom homebuilder in the New Orleans suburb of LaPlace, says the hurricane had a terrible human cost, but it saved Louisiana from a recession.

"It saved our butt," Noel says. "If we hadn't had Katrina, we really would be in the dumps, because our market was not that quick before Katrina."

His business really picked up and stayed strong for about 18 months after Katrina, but it has since tapered off.

Hurricanes Aren't Always to Blame

That's typically what happens, say Eli Beracha and Robert Prati, finance professors at East Carolina University in Greenville, N.C., who studied the impact of hurricanes on home prices and sales. To some extent, the risk associated with the disaster is already factored into home prices, Beracha says. People who move to Los Angeles, for example, are aware that earthquakes are a constant risk.

"It typically stalls the price appreciation and then it accelerates to where it would have been before, if it had not been interrupted," Prati says.

Sometimes larger economic forces mask the local dynamics. Home buyers, for example, seemed unfazed by the three major storms that tore through Florida in 2004. But after Hurricane Wilma whipped through South Florida in October 2005, the housing market began to slow, and residents wondered whether the hurricanes were to blame.

But Brad Hunter, national director of consulting for the housing market research firm Metrostudy in West Palm Beach, Fla., says it turned out that larger problems in the real estate market were emerging that would eventually topple markets across the nation.

Hurricane Andrew in 1992, however, had clear economic consequences, both positive and negative. For one thing, it led to a housing boom in Broward County, just north of Miami-Dade, where much of the worst hurricane damage was sustained, Hunter says. People wanted to live away from the devastation, in an area that was "fresh and new," he says.

Offsetting Construction Jobs

Walter Gillis Peacock, professor of urban planning and director of the Hazard Reduction & Recovery Center at Texas A&M, says he's not convinced that natural disasters have a long-term economic benefit.

Peacock lived in South Florida during Hurricane Andrew and has studied the impact of the storm on the local real estate market.

He says speculators often jump into the market immediately, and home prices rise. But any benefit derived from an increase in construction jobs is often more than offset by losses sustained by other businesses.

The Galveston area of Texas, which was ravaged by Hurricane Ike in September 2008, is now facing serious economic problems, as many homes remain flood-damaged and tourism-related businesses remain closed.

And the deterioration of the national economy has not helped matters.

Opportunities for New Businesses

"Ten years down the road [after a disaster], economically speaking, you may not even notice it happened," Peacock says. "On the other hand, after Andrew, you could still see clear effects of the damage on property values four or five years afterward."

David Flynn, director of the University of North Dakota's Bureau of Business & Economic Research in Grand Forks, says if steps are taken now to find a permanent solution for the flood problem, the local economy is more likely to bounce back.

People tend to move away from an area after a flood, he says. On the other hand, a disaster can open up opportunities for new businesses, especially in the construction industry.

Fargo has the benefit of being in North Dakota, one of the nation's few economic bright spots. North Dakota has a stable real estate market and a low unemployment rate (just 4.2% in January) thanks to strong energy and agriculture sectors.

"After a disaster, it can create entrepreneurial opportunity," Flynn says.

Gopal writes about real estate for BusinessWeek in New York.

Gopal is a reporter for Bloomberg News in Boston.

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