When Disaster Hits Home – Literally

0:00Joe, have you ever lived in a disaster-prone area? My mom, when I was growing up, called my bedroom a disaster area. But besides that, no, short time, obviously. And well, maybe not obviously to some people, but I went to college in South Carolina, in Charleston for a couple of years. Oh, yes. That's very obvious to the average person. Yes. For everybody that's found my Wikipedia page. Yeah. I lived in Charleston, South Carolina, which has been hit by a couple of hurricanes. But besides that, no. We are going to answer a very special question today about what to do if you own real estate in a disaster-prone area, which is unfortunately an issue that is affecting a larger and larger percentage of people.

0:40It's a particularly special episode for reasons that will become clear in a few minutes. Ooh, mystery. Welcome to the Afford Anything podcast, the show that understands you can afford anything but not everything. Every choice carries a trade-off, and that applies to your money, time, and focus. This show covers five pillars, financial psychology, increasing your income, investing, real estate and entrepreneurship. It's double I fire. I'm your host, Paula Pant. Today's episode features that letter R in the five pillars, R for real estate, because we're going to spend today unpacking one very special listener question.

1:19And to do so, my buddy, the former financial planner, Joe Salcihai joins me. What's up, Joe? I am ready to go. I'm buckled in. Let's do this. Let's start with the question, which comes from Prahlad. Hi, Paula and Joe. My name is Prahlad. I am 84 years old, and my wife is 83. We live in a two-story townhouse in Atlanta, and also own a two-bedroom condo on the beach as a second home in Clearwater, Florida. Recently, we purchased a one-story ranch home in Atlanta so that we don't have to go up and down the staircase at this old age. Our condo in Clearwater is on the 9th floor of the 14-storied building.

2:09We love the condo with views of the Gulf of Mexico and the Bay. However, we have not been able to visit it for a long time due to our underlying health conditions. We purchased the condo for 400 ,000 in 2015 and it was estimated to have appreciated to 800 ,000 in 2022. Since then, the price was estimated to come down to 775 ,000 in the spring of 2024. As you know, this area was hit by two major hurricanes, Elaine and Milton, in September and October last year. The lobby of the building was flooded with extensive damage and it is still under construction. The parking area under the roof was also flooded and our car was totaled.

3:02Personally, our condo did not suffer any damage. There has not been any significant real estate buy and sell activities in this neighborhood since it was hit by the hurricanes last year. My real estate agent estimates that the current value of the condo is$700 ,000. The building has been preparing for a major renovation of the plaza deck for the past few years. I anticipate that either we or the future owner would be assessed a large amount, maybe$30 ,000 for the renovation. We were hoping that we could sell the condo and pay off the mortgage for the ranch home we recently purchased in Atlanta and be debt-free.

3:50What do you think? Should we sell it now or wait until some later time, maybe six months or a year? Your advice will be highly appreciated. Thank you both for what you do. Thank you so much for that question. And you know what? I'm super, super happy to hear that they weren't hurt and that their particular condo wasn't hurt because so many people, man. I saw so many photos, Paula, of devastation. So there maybe is a little bit of good news there. Right. Exactly. The silver lining. Yeah. Now you said this is a special question. Why is this a special question? Well, it's because this question actually comes from my dad.

4:35No! It's true. It's true. And I have him sitting next to me right here. Dad, say hello. Hi, Joe. Hey, how are you? I'm fine. How are you? Well, I'm great. Now that we're hanging out answering your question, you must have had lots of devastation in the area, not just your condo building, but did you see any pictures of the neighborhood? Oh, yes, absolutely. It was a big disaster. Many people lost their homes. Yeah. Not to count cars and other things. There are probably thousands of cars, probably, you know, thousands of, you know, hundreds of homes. Yeah, it was really, really bad. Oh, that's horrible.

5:14Well, we're glad that you're safe. But you said you weren't there at the time and you haven't been there in a number of years? We're not there at that time. No, we're in Atlanta. Yeah. Okay. Well, let's dive in, Paula. How do you want to take this? So the first thing that I want to discuss, and I want to broaden this out for the sake of everyone listening, is the wider discussion of how to handle real estate that is located in a disaster-prone area. I took a look at what tends to happen to home values during disasters. I went back to the 1990s so that we have some benefit of hindsight. We have some historic record.

5:52What we saw in the 90s was that following a major natural disaster, home values in those areas dropped somewhere between 2.5 % to 5 % with the most severe impact on homes that suffered direct damage, which in this particular case, even though my dad's particular condo unit did not suffer damage, The building certainly did. The lobby is completely flooded. The elevators were down for many, many days, which when you have a 14-story building, you really don't want the elevators to be down for a week. And when you're in your 80s, you're not looking for that type of a workout. Right, exactly. All the way up to the ninth floor.

6:38Exactly. He mentioned that his car was totaled. I saw the photos, the cars in the parking garage. the water just picked up all of the cars and just mixed them around like - Mixing bowl? Yeah, exactly. Like ingredients in your kitchen mixing bowl. The water just picked up all the cars, moved them around into random locations, and then put the cars back down wherever. So it took days for anyone to even find his car because it had been carried away by the floodwaters. and so it comes as no surprise that there would be an adverse impact on property values after such a major natural disaster. We saw again going back to the 1990s Hurricane Andrew in 1992.

7:26There was the Northridge earthquake in Southern California in 1994 and what we've also seen historically is that it isn't just property values that get hammered after a natural disaster but also that severe disasters lead to increased out-migration rates, which is sort of a jargony way of saying people tend to leave the area. And so one study that was done in July of 2020, published in the Journal of Urban Economics, took a look at U.S. federally designated natural disasters from 1920 to 2010. And it found that across that 90-year time span, severe disasters increase out-migration rates at the county level by about 1.5 percentage points.

8:16And as I mentioned earlier, it also lowers home values by between two and a half to five percent. Which based on your dad's numbers, he's already seen. Exactly. Which leads me to the question, if he were to sell now, does that mean he's selling at the bottom? Because what we know is that areas prone to natural disasters, such as California and Florida, have also over the long term seen some of the biggest long-term property value gains, albeit amidst some steep boom and bust cycles. Sure, because you're mitigating the statistics that you just said, which are for a wider population with the fact that these are areas that generally people want to move to.

9:05I mean, I'm envisioning myself on the ninth floor of this high rise looking out over the Gulf of Mexico. And I think, let's go, let's get there right now. But then volatility has always been a piece of living in these areas, a little bit more volatile market. And the lingering question, which is unanswerable, is as natural disasters become more frequent, how will that change the economics of living in a given area? Because as I mentioned, this study took a look at 90 years worth of history, 1920 through 2010. And I know that the most dangerous words in investing are this time it's different, but let's look at a couple of factors that are genuinely different.

9:53One is that both the frequency and the severity of natural disasters are increasing. The same study in the Journal of Urban Economics found that hurricanes represent less than 10 % of disaster events over this 90-year historical period. But we do know that hurricanes are increasing in both frequency and severity. We also know that the insurance market, as well as the reinsurance market, are truly at the forefront of this. In fact, just a few months before the fires in California, several insurers, including State Farm and Allstate, decided to leave the state and canceled thousands of home insurance policies, particularly in fire-prone areas like the Pacific Palisades.

10:48And that was just a few months before the recent fires happened. So the actuaries at insurance companies are incredibly accurate at predicting risk. Sure. Well, there's another thing that's going on with these insurance companies too, which has to do with state government and the way that the particular policy restrictions in California are different than they are in a lot of states. So maybe we will see those companies come back. But your larger point of, this wouldn't even be an issue if we didn't see these recurring fires every year somewhere in that region. Right. And so the third element that makes it different, we've talked about both the severity and frequency of disaster.

11:35We've talked about the insurance and reinsurance ramifications, which are becoming a much bigger piece of this puzzle. And then the third element is that we are now living in an environment in which remote work, at least for knowledge workers, is increasingly viable, meaning that people are not wedded to staying in a particular area, even if their jobs are based there. Now, that affects only a very limited number of knowledge workers, but it also only takes a single-digit percentage of people to create major effects in a housing market. And so those three factors taken together all play into this broader question of, if you have a home in a disaster-prone area, do you stay or do you go?

12:34That's the wider question that I want to address for the entire audience. And of course, for each individual who's listening to this who does have a home in a disaster-prone area, a big part of that answer is going to hinge on is this their primary residence or not? Do they have family in the area or not? do they have a job that they can remote into or not? Do they have kids in a school district or not? I think there's a couple of big considerations here, Paula. And I think that when you're estimating your budget, I think the idea of estimating, and insurance companies have already told us this.

13:07I'm not saying anything that surprises anyone, but if you live there, I think it's a mistake not to assume that your property holding costs are going to be more between your insurance costs and not just deductible management, but maybe upkeep around the property, whatever it might be, you're going to have to just take that into account because if you don't, and we talked about this the last time that I was here, and I feel like every time I'm here, I want to be very conservative in my estimates. Also, if I'm buying a property, I don't think I look at, you know how historically a lot of people, when they look at a property, they're like, oh, what's the cost of your homeowner's insurance?

13:52And then they will use that cost to model what they think the projection is going to be going forward. I think it's got to be the cost today that the homeowner is paying cost plus or cost times some number to give you more accurate reflection of what your carrying cost is going to be on the property. Right. I think for planning purposes, we have to assume that insurance rates in these areas will increase fairly dramatically. And insurances, you know, I've heard from a number of people that live along the coastlines too. And I've seen this online, people saying, oh, these insurance companies, they're just ripping us off.

14:31The answer to that is insurance companies are regulated by the state. And so when they send you notices and when they raise premiums, they have to be really careful about what they do. because the regulators are watching every move. And so I feel like these calls of insurance companies ripping us off, are they making sure they make a profit and they stay in business? Yes, they are. 100 % they are. But when they warn you that prices are going up dramatically, which if you live along either the East Coast or the West Coast, you know what I'm talking about? If you live in Colorado, if you live in any of the wildfire regions, you know exactly what I'm talking about.

15:08You've received these notices where insurance companies making sure they aren't sued and they aren't pursued by these regulators are telling you today that the next two to three years are going to be brutal when it comes to increases in your property casualty coverage costs. Right. The level of regulation around insurance companies and the degree to which their hands are truly tied, I think, would shock the average observer. Absolutely. They need to stay solvent, right? The last thing that you want is for an insurance company to not have money to be able to pay out on its claims. Which is why when you're shopping insurance companies, you don't want to just shop lowest cost provider, which is what 99 % of the discussions that I see online are people talking about how do I lower my cost?

15:58Well, the key is I want to make sure that I get coverage, right? So I want my insurance company to be there when something bad happens. So I want to look at claims payouts. I want to look at the percentage of claims that are denied because an insurance company that denies your claim a ton is going to be very, very combative when you need the most. And you don't want that. Exactly. And that's something to look at not only when you're shopping for homeowners insurance, but also if you're shopping for health insurance, for those of us who buy health insurance on the open market. Yeah. Our goal is that we don't have to use it.

16:36But if we do have to use it, I don't want to be fighting with my insurance company. So I took a look at how long it takes home values to recover after that home value has been impacted by a hurricane. According to research from ScienceDirect, home price appreciation for hurricane-exposed areas typically increases within three years from the date of the hurricane. Often, these depressed home values are not just a result of out-migration from the area, but also there is correspondingly a temporary decrease in housing supply as properties are repaired or rebuilt, which means that the construction force in the area is spending their time repairing and rebuilding homes rather than building new construction.

17:22So labor and materials are being dedicated to renovation rather than new construction. So that decrease in new housing supply actually helps with home values in the disaster-prone area because as demand picks back up again, that lack of supply helps bolster home prices back up. That's according to a Science Direct report. There's another report from the Counselors of Real Estate that demonstrates what they refer to as a recovery overreaction pattern in housing markets after hurricanes, in which home prices and transaction volumes, both in impacted zip codes, tend to dip sharply, specifically in the first two quarters after a hurricane, followed by a positive rebound.

18:08So they found, you know, there are three factors that you think of. You think of severity, you think of frequency, you also think of duration. What they found, as compared to ScienceDirect's findings, was deeper severity but shorter duration of the economic hit. their findings echo another study done by risk wire that analyzed the effects of four hurricanes there was hurricane katrina in 2005 hurricane harvey in 2017 hurricane ian in 2022 and they went all the way back to 1989 for hurricane hugo so it was a really a cross-section of hurricanes that stretched from 1989 to 2022, what they found was that home price appreciation, with the exception of Hurricane Katrina, home price appreciation tended to go back to pre-disaster levels after about a year.

19:06Basically, if you look at this cross-section of studies, you see anywhere between one to three years as the recovery period, which does create opportunities for investors who want to buy during those depressed times. Buy into it when people are looking to sell. I'm also fascinated by the fact that there's an exception with Katrina, which makes you do one of two things. number one, think about why, why would Katrina be different than the others? And to my mind, I would think, and I don't have data, so this would be just my working hypothesis until I dug in more, Paula, but I would think because it was such a direct hit on New Orleans and because of New Orleans is below sea level versus most areas that are not, like there were some really unique challenges for New Orleans versus all those other hurricanes.

20:11I think there were so many things that were different about that. And truly, if we go from this bigger focus to a much more narrow focus, definitely a different area than Clearwater, Florida. Right. Exactly. Because a place like Clearwater, particularly being part of the broader Tampa-St. Pete-Clearwater triangle has some staying power. It has an economic moat. Up till this point, we've been having a discussion broadly for the entire audience about factors to consider if you own a home in a disaster-prone area. Let's take a brief break to hear from the sponsors who make this show possible. And when we come back, let's dig into an answer for my dad as to what he should do with his Clearwater condo.

21:01He's like, wait, what? You're actually going to answer it? The kids are back in school now, and I finally have some extra time to plan a weekend getaway for just us. We've been wanting to visit Lancaster County, Pennsylvania for a while now because I've heard so many people rave about it. We love exploring new places, finding the cutest shops, and eating at restaurants that the locals love. DiscoverLankester.com is the best place to learn about the unique things to do and upcoming events. Plan your trip alongside us at DiscoverLankester.com slash amplified. This Friday, the NBA on Prime tips off with their debut doubleheader.

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23:52Welcome back. Before we get into the second half of this episode, I want to remind everyone that our course, Your First Rental Property, has opened for enrollment. We opened our doors yesterday. Hooray! February 10th, we opened our doors. Enrollment will be open this week and next week, and after that, we're closing our doors. So if you want to learn how to purchase and manage homes in a smart way, this is the course for you. If you're looking for that perfect Valentine's gift for yourself, give yourself the gift of real estate love. Exactly. So if you had to affordanything.com slash enroll, that's where you can get all of the details.

24:32That's affordanything.com slash enroll. I should have been in marketing, not financial planning. Maybe not. Every person and marketing's like, yeah, Joe, don't call us. We'll call you. All right. So what should my dad do? I mean, it sounds as though, given how recent those two hurricanes were, that his condo is at the bottom of the market right now. He's in March of 2009, and it's taking the brunt of the hit. You would think based on the statistics that the correct answer is maybe not to wait a long time. I think I would pay more attention to the month-by-month reports than I normally do, Paula.

25:14See over the short term what the trend is, and is this fulfilling what you're predicting, I think, would be the natural outcome, which is in one to three years, we get back to pre-down levels. But if the market's not bearing that out, I don't know that you need to wait that long. Because this isn't even where I would start. I mean, the place that I always start with is, what do you want to do? And then number two is, will that work? Because then we don't have to do any of the prognostication at all. If it will work and it's what you want to do and somebody else makes a little more money, fine.

25:51When it comes to your financial situation, you're going to have the peace of mind knowing that you were able to reach your goals and get where you wanted to go anyway. That said, if there's no threat right now and you can hang on and recoup that amount, and certainly if it's a boomerang right in this area, re-appreciates faster than your average piece of land someplace else in the United States, then if I can hang on, then I will. The best place to begin from is, do I need to sell right now? And it sounds like for your dad, he doesn't need to sell right now. In just a moment, I'll bring him on to either verify or contest with the sounds like he doesn't need to sell right now.

26:38Confirm or deny. Exactly. To confirm or deny. But before we do that, just a couple of other thoughts on his situation. One is that the lobby of the building, as he mentioned in the voice note, the lobby of the building is still under reconstruction. It was flooded out. It was destroyed. Any buyer who was coming to tour the building, the first impression that they're going to get is a flood ravaged, decimated lobby. That's a reason to wait. Exactly. What a first impression. Yeah, it blows me away, by the way, that people can't see beyond that, but they can't. And every study shows that they can't, which is the reason why when you're selling a house, you make it look like the pottery barn, you know, because people can't see beyond your personal photos.

27:27They can't see beyond the weird color that matched your daughter's room, but isn't right for the spare bedroom for somebody that doesn't have a daughter, your daughter's age. I've always been amazed that the lack of creativity that the average buyer has. But you need a lot of creativity, I think, to look beyond the ravaged lobby and go, when's the next time this is going to happen? And what if I had lived here during this time? Like, we want to get rid of all those thoughts. Right. The only person who's going to look at a completely flood ravaged lobby and think, ooh, this is where I want to buy.

28:04That's only going to be an investor. Yeah, a developer, right? Another question is, how long is it going to take for that lobby to be restored? Is there any sort of estimate? Yeah, that is an important question. I mean, not that it matters. You may want to wait it out anyway, but still, I think that's materially relevant. A few other factors that I would think about, I would be looking not only at home values in Clearwater and particularly in that zip code, but I would also be looking at job growth and population growth in the area because, you know, we talked earlier about net out migration. Is that happening or not?

28:43Are people leaving the area? Or given especially the Tampa, Clearwater, St. Pete, that is one of the most economically robust areas of Florida. Are jobs still coming in? Is population growing? Because so long as jobs continue to be created there, then population will grow. People go where the jobs are and people need homes. And so I would be much more concerned if I looked at population and job statistics in the area and saw a big decline, I would be far more inclined to hold if, by contrast, I saw a big increase. It strikes me that all this data is publicly available, and yet how often does somebody do this fairly simple analysis that you just did in the last 30 minutes?

29:28If you just take 30 minutes to explore some of the questions that would be relevant during this time, you're going to come upon a better decision. The other thing that's going to happen too, though, Paula, that I see happens a lot, and so do you, is you also may get analysis paralysis, which is there's so much data that you do nothing, which is why I still want all the data. I still want to know the answers to all these questions, but I also want to not lead with that. I want to lead with what do I want to do? I want to know what my bias is first. What's the thing that I'm looking to do? Because then what this is doing then is paving a way toward that outcome that you're looking for.