Hurricanes, Catastrophic Risk, and Real Estate Market Recovery
Graham, J. Edward, Hall, William W., Schuhmann, Peter W., Journal of Real Estate Portfolio Management
This paper examines data from the Cape Fear region of North Carolina, an area at elevated exposure to hurricanes and catastrophic risk. The findings support an earlier documented pattern of price declinations with successive hurricane landfalls. The findings also reveal a tempering of this trend in the years after the last major strike in 1999. A test statistic is constructed for the timing and intensity of the real estate market reaction to perceptions of catastrophic risk. A Chow test is used to frame market responses to repeated hurricane landfalls in the study area. The test reveals a structural shift in the housing market in the periods following the last two in a series of four hurricanes. Home prices recover and market stability returns in the years following the last storm. The findings are important to varied stakeholders in the coastal real estate market.
The Cape Fear region of North Carolina, near the South Carolina border along the Atlantic coast, experienced four hurricane landfalls between 1996 and 1999; Hurricanes Bertha and Fran struck within two months of one another late in the summer of 1996, with Bonnie coming ashore in August of 1998 and Floyd in September of 1999. The real estate market seemed to exhibit no grave consequence following the storms of 1996, as affirmed with this study, but responses following Bonnie and Floyd were successively more extreme and more immediate. The years following Floyd have framed a recovery in the housing market. This is the first study to document these patterns, to describe a market's possible confusion over its exposure to catastrophic risk, and to affirm that market's "recovery" as the time since the last major hurricane passes and memories fade.
A substantial literature considers the impacts of catastrophic events such as floods, earthquakes, and hurricanes on real estate values. The academic and practitioner press remark on the personal and financial costs of these events; suggestions vary from encouraging greater government involvement in the prediction of natural disasters to more focused lender, builder, and insurance measures to minimize losses when these catastrophes occur.
Among these studies, Graham and Hall (2001, 2002) highlight the impact on the housing market of increasing expectations of one particular catastrophic risk-hurricanes. The authors find that with increased expectations of catastrophic risk following a period of unprecedented hurricane activity, both home values and real estate market sentiment suffer. They examine transactions in the area around Wilmington, North Carolina-the Cape Fear region-a coastal community portrayed in Exhibit 1. Graham and Hall report a declination in home values following the last in a series of hurricane strikes, the market effectively "giving up" and throwing in the towel after four hurricane landfalls in as many years. Likewise, they report that market sentiment-as evidenced by declining monthly home sales and widening relative spreads between asking and selling prices-deteriorates following the last of these hurricanes.
A premise is forwarded in those studies that the market is able to "shrug off' the first one or two hurricanes as "bad luck," but with Hurricane Bonnie in 1998 and Hurricane Floyd in 1999, perceptions of the likelihood of hurricane strikes in the study region may have changed, and with increased expectations of hurricane activity and hurricane damage, home prices and the housing market suffer. No circulating study, though, examines the duration of the change in the housing market or the recovery of home values following periods of perceived increased catastrophic risk; nor does any study consider the depth of the structural shifts in the market that may take place around the time of hurricane landfalls.
Bin and Polasky (2004) and Bin and Kruse (2006) echo Graham and Hall (2001), finding property values negatively associated with both hurricane flooding and exposure to storm surge wave action; their studies employed data from an area just north of the Cape Fear region. …