In recent weeks, the United States has been hit with not one but two major hurricanes. In fact, at time of this writing, it is still somewhat unclear exactly how far-reaching the effects of Hurricane Irma, which is working its way through Florida and up the east coast, will be. Irma comes fast on the heels of Hurricane Harvey, which was the first major hurricane to make landfall in the U.S. since 2005 and flooded areas of Texas with more than 40 inches of rain in a four-day period. Harvey displaced at least 30,000 people and caused 70 confirmed deaths in the United States, resulting in FEMA Director Brock Long dubbing it “the worst disaster in Texas history.” Losses were estimated in the wide window of $70 billion to $200 billion. Irma made landfall in the Florida Keys as a category 4 hurricane, but estimates of damages and deaths are pending since many of the islands and portions of Florida are presently inaccessible and have sporadic or no cell service.
While this type of devastation threatens residents, drains resources, and preoccupies not just those in the middle of the physical storm but the thoughts of the entire country, real estate investors face a unique series of issues when hurricanes and other natural disasters strike. They worry for friends and loved ones, grieve over the destruction, and in some cases deaths, then join all those who were impacted by the event in dealing with logistical issues like insurance coverage and repairs.
All of this begs the overarching question: Is it worth it to own real estate in an area where hurricanes are likely to occur?
The answer, as it turns out, is a largely unqualified “Yes.” As a real estate investor, owning property in an area of the country where these types of warnings occasionally occur (and make big headlines) may be a stressful thought. However, researchers at the Federal Reserve Bank of Dallas and Ecole Polytechnique* concluded that hurricane strikes tend to have a net positive effect on housing prices in an area spread out over a timeline of nearly four years with a relatively small negative effect on real incomes in the much-shorter term.
While this may be difficult to digest when you think of the “billions of dollars in damages” that have dominated the headlines just recently; researchers argue that the bigger issue for any area struck by a hurricane is not long-term economic loss, but short-term economic disruption. An investor who is prepared for this possibility and has strategies in place to deal with property damage and temporary disruption of cash flow may well find that the long-term effects of a hurricane strike in his or her investment region of choice are largely negligible.
Furthermore, FEMA data indicates that as disaster-struck areas of the country rebuild, home values tend to rise because when homeowners rebuild, they rebuild bigger and better than what they had before. FEMA notes this is not just good for property values, but also makes it more likely that the new structures will withstand the next environmental disaster because they are usually built to stricter building codes and standards. Although the implementation of such standards and the natural inclination to “go bigger” when replacing lost property can slow rebuilding efforts, a study conducted by Beth Wolff Realtors indicates that just two years after tropical storm Allison did a great deal of damage in southeast Texas in 2001, home values were substantially higher just two years later. Square footage for replaced homes was significantly higher, also. The researchers speculated that delays associated with paperwork and insurance payouts give homeowners time to plan renovations and expansions, even if they end up having to use their own savings to finance part of the construction.
Preferred changes and upgrades include upgraded kitchens and bathrooms, extra bedrooms, and disaster-proofing features like extra drainage around a home to protect against future flooding. Homeowners may even opt to replace one-story homes with two-story ones or install dramatically different interior workings, such as a designated hurricane “safe room” with no exterior windows, one door, and flood proofing, to help them feel more secure in the new structure and add to the value of the property.
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*“The Impact of Hurricanes on Housing Prices: Evidence from U.S. Coastal Cities.” Anthony Murphy and Eric Strobl. October 2010.
Carole Van Sickle Ellis is the editor-in-chief for Think Realty Magazine. You can reach her at firstname.lastname@example.org.