Natural disasters have been increasing in severity and frequency over the last few decades. And with home values growing ever-higher, it’s important for homeowners and real estate professionals to understand how natural disasters impact a home’s value.
Unfortunately, there isn’t always a clear connection between natural disasters and the housing market’s response. You might think a natural disaster would drive housing prices down due to damaged buildings and fear of a recurrence. But this isn’t always the case.
Real estate agents are heavily impacted by market changes resulting from natural disasters. A dip in property values could reduce a real estate agent’s income, while high demand in areas adjacent to a disaster zone could mean an influx of buyers.
Let’s look at the factors that determine how a natural disaster will impact a home’s value. Then we’ll explore some real-world examples.
Factors that Determine the Impact of a Natural Disaster on a Home’s Value
There are several factors that determine the real estate market’s reaction to a natural disaster:
Extent of the damage
Localization of the damage
Demand for the location
Insurance policies and practices
Extent of the Damage
The value of a home with extensive damage will naturally be more impacted by a natural disaster than a home with minimal damage. Damage from a natural disaster can fall at any point on this spectrum and is likely the most important factor in determining how much a home value will change following the disaster.
Even if the damage is repaired, if historical evidence of previous disasters remains, it can lower the value of a home. For example, if flooding has left stains behind your walls or a crack in your foundation, it's a tell-tale sign the home may be at risk to flood again. Therefore, it may be worth less.
Localization of the Damage
Natural disasters can easily affect nearly every home in a given neighborhood. Flooding, for example, only spares homes that are far enough from the water source or on high enough land. Other natural disasters destroy homes at random. Tornados are notorious for taking out one block and leaving the opposite side of the street untouched. And yet other natural disasters hit homes differently, depending on each home’s structure. Earthquakes, for example, can level older homes while modern structures make it through just fine.
If an entire area is affected, the values of all properties in the area will likely be driven down. Devastation on this scale likely disrupts local agriculture and supply chains, making the area less desirable in the immediate future.
If the area is limited, the local housing market will probably not take such a hard hit.
Demand for the Location
In many parts of the country, locals are somewhat used to the natural disasters frequently experienced in the area. Homeowners are aware of the risks and choose to live there anyway. After all, there are very few places on earth that aren’t susceptible to one type of national disaster or another. For decades, California was the hot local, despite the ever-present earthquake threat. Today, buyers are moving to Florida, which is known for difficult hurricane seasons, and to Texas, which is susceptible to floods, hurricanes, and tornados.
If your market is in-demand, you’ll experience less fallout from a natural disaster than less-desirable markets.
Insurance Policies and Practices
Insurance policies and practices have a profound impact on home values following a natural disaster. If insurance companies expect a recurrence of the disaster, they could increase homeowner’s insurance rates to mitigate the risk. This would increase the cost of homeownership in those areas and could cause lower demand. If the demand slips, home values are likely to slip as well.
On the other hand, insurance companies often make it possible to build in disaster-prone areas. Without flood insurance, for example, Brian Harmon would almost certainly not be able to remain in his home in Kingwood, Texas. The home flooded 22 times between 1979 and 2017. Harmon doesn’t want to walk away from his home, and he’s willing to pay high insurance rates to remain in the area.
Real-World Examples of Home Values Reacting to Natural Disasters
Here are a few examples of how natural disasters have affected home values.
Hurricane Harvey, 2017: Much of Texas, Particularly Houston
Following Hurricane Harvey in August 2017, the Houston real estate market experienced a drop in inventory, partly due to homes that could not be occupied due to flood damage. Because Houston was still an in-demand area, the lower inventory, combined with buyer demand, drove home values up for properties that were not directly impacted.
By August 2018, single-family home sales in Houston were up 40.3% from August 2017, and home values were up 2.1%.
Paradise Wildfires, 2018: Paradise, California
In 2018, the small town of Paradise, California, was decimated by wildfires. An estimated 95% of the town’s structures were burned, leaving little real estate of value left.
Property sales in Paradise plummeted by 40%–50%. The Paradise residents who could afford to move relocated into adjoining Butte and Sonoma Counties, which were unaffected by the fires. In the three to six months following the disaster, Butte saw a 3% home value rise, and Sonoma saw a 6% rise.
Rising Sea Levels, Ongoing: Florida’s Coastal Regions
The rising sea levels brought about by climate change are an example of a slow-burn natural disaster. Unlike most disasters which come suddenly and without warning, we’ve been watching sea levels rise for years.
Since 2018, real estate prices in tracts of land that are more exposed to rising sea levels have seen slower value growth than tracts that are less exposed. As of 2020, the value difference between more-exposed and less-exposed areas was 5%–10%.
But that doesn’t mean people aren’t buying! According to Erin at Coldwell Banker Schmitt Real Estate Co in Key West, the market is still hot as of March 2021.
“We still have low inventory and an influx of buyers," said Erin. "And we’re still seeing price increases. While the market could cool at any point, there’s no indication today that buyers and homeowners are concerned enough [about rising sea levels] to make a move.”
What Can Real Estate Agents Do to Protect Their Clients
As a licensed real estate professional, you have a fiduciary duty to protect the interest of your clients.
Here are a few ways you can protect your clients when it comes to home values and natural disasters:
Make it your business to know which areas of your market are susceptible to natural disasters.
Be forthcoming. Make sure your clients are aware of the risks when they’re searching in a disaster-prone area.
Factor the risk into your value analysis.
Explain the options to your clients. Flood insurance, for example, might help your clients consider areas they would otherwise avoid.
Fundraise for emergency kits in homes and local schools.
Use the risk to your client’s advantage when negotiating offers and counteroffers.
If there is heavy damage after a disaster, be a leader in your community. Organize projects to help repair and rebuild.
Natural disasters are inevitable. But they aren’t a death sentence for real estate values. Take the precautions you can before disaster strikes. And when your area is affected by an event, take an active role in helping the community recover.