Focus on Real Estate Analysis: How Major Hurricanes Impact Housing Prices and Transaction Volume

Article excerpt

WE SEEK TO INVESTIGATE THE EXTENT TO WHICH COASTAL impacts of major (1) hurricanes may affect short- and medium-term housing prices. Our investigation is largely motivated by the increased strength and frequency of storms threatening the eastern and southeastern United States. Namely, several major hurricanes have recently impacted the Gulf of Mexico region and the Eastern Seaboard causing billions of dollars in damages. Escalating worldwide focus on global warming and other potential causes of this increased meteorological activity has not altered the contention by meteorologists that this is not an aberration. On the contrary, widespread expectation of future storm seasons characterized by above-average frequency, strength and duration of hurricane-level storms remains the consensus. It follows then that a better understanding of the economic impact of these storms is a beneficial contribution to real estate literature.

CONVENTIONAL WISDOM AND THE POPULAR PRESS

Conventional wisdom and the popular press suggest that a noticeable shock to the housing industry is to be expected after a major hurricane. How that shock plays out, however, is not so clear. Following the recent sequence of highly active storm seasons, the popular press published mixed opinions regarding the repercussions these storms might have on real estate markets sustaining substantial damage. Generally speaking, press articles imply the reaction in residential real estate to major storms takes the form of a bubble. That is, markets surge from a housing shortage immediately following a storm, and then correct in the medium term as supply gradually returns to prior levels. For example, Katrina, the most notorious of these recent storms hit New Orleans in August 2005. Rich (2005) suggests that storms like Katrina are a stimulus to local real estate. Pointing to frenzied buying activity as people left homeless scramble to secure a residence, the shortage of building supplies driving up housing costs, and out-of-state investors buying in droves, Rich paints a rosy picture of real estate markets impacted by a major storm.

Roney (2007) also points to an initial surge in residential real estate, quoting the National Association of REALTORS[R] (NAR) as her source for median home sale prices jumping more than 8.7 percent in the New Orleans area immediately following Katrina. Roney then backtracks, however, suggesting that home prices rose only as a direct result of federal and state aid for the multi-billion dollar damage left in the wake of the storm. She cites a subsequent price correction of 6.7 percent as evidence of the unpredictability of home values. Bajaj (2007) explains this drop by quoting Jan Hatzius, a Goldman Sachs economist, as saying that prices have fallen in the past year to correct for a surge immediately after Katrina, again suggestive of a bubble pattern.

Not all press articles project a bubble reaction, however. Keegan (2005) points to his personal experience with Hugo in 1989 and its impact on the Charleston, S.C. region, observing a massive and lengthy recovery effort after substantial devastation in the region. He also points to panhandle and central communities in Florida "still reeling" a year after storms ravaged these areas. Nonetheless, even if it belies conventional wisdom, practitioners and academics alike might be interested to know what the data collected surrounding these events do suggest.

PRIOR ACADEMIC RESEARCH

Conventional wisdom and popular press articles aside, existing academic research on this subject is sparse. In fact, very little in academic or practitioner real estate journals has addressed natural disasters and their impact on residential prices.

Hallstrom and Smith (2005) hypothesize that housing values respond to information about new hurricanes. Using a difference-in-differences framework based on the 1992 storm, Andrew (one of the strongest storms to ever hit the U. …