Real Estate in the Aftermath of Hurricane Katrina

by Alicia Filter October 30 2005, 15:58

Hurricane Katrina struck the Gulf Coast on August 28, 2005 and was one of the worst natural disasters in American history.  Heavy rain and strong winds destroyed much of New Orleans and surrounding areas, leaving the Gulf Coast under water for weeks.  For houses not completely blown to the ground by the 145 mph winds, the amount of damage sustained generally depends on the length of time the home was submerged in floodwaters, allowing mold and rot to thrive in the structure of the home.  Because much of New Orleans was submerged for 2 weeks or more, the secretary of the Louisiana Department of Environmental Quality currently estimates that between 140,000 and 160,000 homes need to be leveled and completely rebuilt.  [1] 

How is the real estate market affected in the wake of a devastating hurricane? 

According to the National Association of Realtors, hurricanes have historically had only short-term effects on the price of homes. [2] Initially, a real estate boom was predicted post-Katrina, especially for the areas of the city that were not affected by flooding.  Since Hurricane Katrina dramatically decreased the supply of structurally sound, non-flooded housing, some real estate agents predicted an increase in quick housing sales ranging from a 20 percent to 30 percent increase. [3]  However, this prediction did not become reality.  Agents in the area are hard-pressed to find buyers, and the houses agents had for sale prior to Katrina have been destroyed and are mostly total losses.  [4]  Since New Orleans is still fairly deserted and people are slow to return, there is a larger supply of homes that were not destroyed by the hurricane, than there is demand for homes in the market.

One good sign for the real estate market is that housing starts have remained strong since Hurricane Katrina occurred.  [5] Housing starts and building permits are a leading indicator of the strength of the real estate market, since they indicate new construction and growth. The Census Bureau reported that national housing starts rose last month by 3.4 percent, making September the third-best month on record, despite the devastation on the Gulf Coast.  [6]  In addition, the South region of the U.S. had the highest gains in the country for housing starts with an increase of 6 percent in September. [7]  According to the Census Bureau, the impact of Hurricane Katrina on the South was minimal, since the area affected by Katrina represented such a small portion of the South region.  [8] 

Overall market strength seems not to have been affected by Hurricane Katrina.  However, one problem for the strength of the market can be seen in increasing costs of building materials.  New Orleans is the country's main port for the importation of cement and other building materials.  [9]  The port of New Orleans has a specialized facility for handling cement, and handles 12 percent of all cement coming into the U.S. each year. [10]  Since the New Orleans port is closed, it follows that cement prices will rise, as will other building materials since these materials cannot be brought into the port of the area where the materials will be used for building.  Materials will have to be transported from other areas of the country, which means rising costs that will either be passed on to homeowners, or construction companies will be forced to lose profits if they have committed to perform building contracts at a fixed price.  Rises in construction costs can only be passed on to the extent that the market allows, but overall, people can expect higher renovation and building costs in the wake of Hurricane Katrina.  [11]      

Sources

[1] Steve Almasy, New Orleans to Rebuild Among Uncertainty (Oct. 4, 2005).http://www.cnn.com/2005/us/10/03/new.orleans.rebuilding/index.html

[2] Mary Foster, Katrina Flattens Real-Estate Sales (Oct. 26, 2005),http://www.thenewstribune.com/business/story/5284315p-4794369c.html

[3] Id.

[4] Id.

[5] Chris Isidore, Housing Starts Stay Strong Post-Katrina, Money, October 19, 2005,http://money.cnn.com/2005/10/19/news/economy/housingstarts/index.htm

[6] Id.

[7] Id.   

[8] Id.

[9] Lee Christie, Katrina Will Drive Up Housing Costs, Money, September 5, 2005,http://money.cnn.com/2005/09/08/real_estate/buying_selling/katrina_impact_on_housing

[10] Id.

[11] Id.

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