The destruction caused by Hurricane Sandy has the potential to sink real estate values across the Northeast, and is threatening to derail the national housing recovery that has been gaining steam in recent months.
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Studies have determined that disasters causing widespread damage have historically dragged down real-estate prices in the areas where they occurred. According to Robert Simons, a professor of urban planning at Cleveland State University, the damage caused by the latest storm is likely to continue the historical trend.
"There's going to be an effect," he says. "In natural disasters like this, it changes the way that potential buyers look at an area."
It's not yet clear what the total cost of recovery from Sandy will be. But there was much in harm's way: According to CoreLogic, a real estate data firm based in California, $88 billion worth of homes were put at risk by the storm. New York has $35.1 billion at risk, while New Jersey has $22.6 billion.
Simons estimates that prices for undamaged homes could drop as much as 5 percent. Based on his own post-disaster research, Simons estimates that prices of damaged homes could fall as much as 12 percent.
"With damaged properties, you have the cost to fix it along with the additional insurance required after a disaster," he says. "Other kinds of personal losses are all covered by the seller. That's not the problem of the next buyer and isn't priced into the sale cost."
Simons adds that a negative stigma is often attached to areas affected by natural disasters. "There's always the concern that there's a potential for reoccurrence," he says. "The hope is that the stigma disappears over time. If [a natural disaster] happens once, it's going to be bad for a year or two, then hopefully it's going to wear off."
Price declines hitting an already down area. The real estate market throughout most of the country has been showing signs of life in recent months. The lone exception has been the Northeast.
According to the National Association of Realtors (NAR) November report on existing home sales, sales in the Northeast fell 6.3 percent in September. Median home prices in the area fell from $249,800 in August to $238,700 in September.
Housing analysts have blamed the area's slow recovery on a weak regional economy. Lawrence Yun, chief economist at NAR, says Sandy would present yet another challenge to the area. "It's going to be a localized impact. Housing starts in New Jersey, New York, and Connecticut have been somewhat sluggish. In the states that were impacted by Sandy, it was already a sluggish recovery," he says.
History suggests a tough road ahead. Studies done in the aftermath of natural disasters paint a stark picture of what immediately lies ahead for the housing markets affected by the storm.
A report issued by the Brookings Institution four years after Hurricane Katrina devastated New Orleans found that the housing market there had yet to fully recover. The Land Institute of Japan found that the price of Tokyo condominiums dropped 7.2 percent in the year following the March 2011 earthquake that caused the Fukushima nuclear disaster.
According to Simons, these numbers largely reflect how outsiders perceive areas affected by natural disasters. Coverage of natural disasters focuses on the destruction they cause and often do not reflect realities on the ground.
"To people that already live in the area, the destruction probably won't matter that much," he says. "Disasters affect the people coming from the outside. That makes a difference in how they view the place, so there might be a drop in demand."
A disaster bounce? According to Yun, any short-term market downturn following Sandy is likely to be followed by a quick rebound. "There's going to be a pause on economic activity in the quarter. There are slower home and retail sales," Yun says. "But the need to rebuild, the injection of insurance money and federal money leads to a boost in economic activity in the subsequent quarters. We're going to have weaker activity now, but stronger economic activity in the long term."
Yun adds that the need to rebuild homes helps industries that support construction. "Homebuilding directly leads to so much more economic activity," he says. "Within three to six months, one begins to see an uptick, particularly because of the homebuilding and all the secondary related economic activity like plumbing and contracting."
Joseph Pasquarella, managing director at Integra Realty Resources, a real estate consulting firm in Philadelphia, adds that the area affected by Sandy would more quickly rebound because of its economic importance. Wall Street, and the people who work there and live in affected areas, will be back up in no time.
"They will quickly rebuild those cities in New Jersey and in New York," he says.