With the recent devastation due to wildfires in the Central Texas region, we thought it would be appropriate to outline the impact wildfires can have on real estate and the housing market. While not specific to the most recent fires, these are common effects a wildfire can have on a local market.
IMPACT ON THE MARKET
The most significant impact to the local market happens in the immediate aftermath of the fire. In a case where a large number of homes were partially or completely destroyed, the real estate market immediately following a wildfire will likely experience a lull in sales activity, whether new or resale. Those in the path of destruction are not ready to move forward and will likely have delays associated with insurance claims. Those who were looking in the area before the fires hit are likely to delay their purchase or begin searching elsewhere. Because the natural beauty of the land is so drastically altered after a large wildfire, the desire to move into such an area will decrease, at least in the short term.
If the area contains rental units, those displaced residents will seek new accommodations elsewhere. Because they did not own, they would not have the ability to wait for rebuilding to occur before they find a new place to live. If the area contains owner-occupied structures, insurance delays and the time to rebuilt will slow any normal real estate activity. Owners in the area whose homes were up for sale and not damaged by the wildfires will find fewer potential buyers interested in their homes, thus delaying the time for them to sell and move to another location as originally planned.
INSURANCE AND WILDFIRES
Home owner’s insurance is a very localized product. Every area is subject to their own risks and have distinct histories, forcing insurance companies to evaluate each scenario to determine the impact on policies in the area. Immediately following a fire, some insurers will stop writing policies in the area out of fear that they will be insuring an already damaged home. Most insurers will also increase premiums for those who file claims and sometimes across an entire region due to the cost of paying out benefits to those impacted.
Interestingly, even though the potential for future wildfires in an area is drastically reduced after the initial fire, the insurance premiums rarely goes down. The premiums paid are as much an indication of future risk as they are an attempt to recoup losses from previous claims. In the insurance companies’ defense, the risk of an individual structure catching fire does not disappear simply because vegetation in the area has been removed. However, future residents will almost certainly be made to feel the impact of the wildfires when new insurance policies are written.
Watch for the potential of higher premiums, especially in higher risk areas. Also, underwriting standards could intensify in wildfire prone areas. Some insurance companies may even add more loss control services to save the individual properties they insure, such as brush removal, roofing material recommendations, etc. In the recent fires in Central Texas, one insurance company had wildfire protection service teams on the ground in Bastrop, Spicewood, and Steiner Ranch spraying non-toxic fire retardant on the homes they covered in the impacted areas to try to save as many structures as possible.
RETURN OR MOVE ON
Fire is a unique problem. The devastation can be quick and complete. The visual imagery is startling and the landscape becomes a lingering reminder of the destruction, even months after the fire. The emotional impact on those whose homes are damaged or destroyed can be enormous. Some will fight tooth and nail to rebuild and return to the life they remember. Others will move away from the area never to return again. Each community is unique and there is no way to predict the percentage of residents who will return versus those who will leave. What is certain is that the scars last and that includes the scars on the housing market.
While there is no steadfast rule, those who have owned in a particular area for long periods of time are more likely to return and rebuilt. Newer residents, and especially renters, are less likely to have built up a strong enough connection to the area to go through the complete rebuilding process. The time it takes to rebuild will also impact the decision to stay or leave.
WILDFIRES AND DELINQUENCIES
The insurance and rebuilding process becomes complicated when the original property was delinquent in their mortgage payments. The lender would be protected in this instance by the home owner’s insurance policy for the amount of the principal owed. However, it is less clear what happens to fees and fines that are due. When possible, the lender would expect to have those paid as well. The situation becomes more complicated when the rebuilding begins. If the home was in a delinquency status, the lender will use the money from the insurance claim to cover the principal remaining on the original note. The displaced resident will most likely be unable to obtain a new mortgage loan due to the delinquency status of the previous loan, so they would most likely be unable to rebuild unless it could be done in an all cash transaction.
Homes that had already gone through the foreclosure process and were bank-owned (REO) at the time of the fire were almost surely insured, allowing the lender to recoup the losses from the destruction of the property and they would still maintain the land to sell in the open market.
PROPERTY VALUES AND TAXES
One of the lingering impacts of a wildfire is on property taxes. While rare, in some instances following a larger fire event, the tax district will reappraise the homes that are destroyed providing a much-needed break to the wildfire victims. However, this comes at a price. By reappraising homes at a lower value as the result of a fire, the taxing entity (city, county, school district, etc) would take in less money to provide nearly the same amount of services. In these times of tight budgets and looming shortfalls, lowering tax revenue can hurt more people than it helps. Of course, every wildfire has its own unique set of circumstances and decisions of this nature are taken by each location independently. At face value, reappraisal seems like a nice thing to do, but a look at the impact of reappraisal quickly makes it clear how much the taxing entity could suffer as a result. Just from the properties that will not rebuild, the overall tax collections are going to decrease, so reappraising an entire area could have a major impact on government services and budgets going forward.
By some estimates, values of the land could decrease 50% or more. Remember, value is a measurement of supply and demand. If the visual beauty of an area is destroyed or damaged, fewer people will want to reside there, bringing values down.
Another option that is available to residents of Texas comes from a state law that allows property owners the option of paying their taxes in installments, rather than as a single lump sum. The installments stretch over as much as seven months and do not include any additional fees or penalties. This law is already in place and only requires that the property was damaged and resides within a designated disaster area.
It isn’t often that we have to deal with a catastrophe of this nature, so understanding all of the ramifications is difficult. The housing industry is an important part of any rebuilding efforts and we hope this information helps to clarify the impact of wildfires on home ownership, lending, insurance, and property values.
For more information about ways you can help the wildfire victims, please see our previous post by clicking here.