Hurricane Season Has Arrived: How Should Investors Prepare?

June brings summer weather and massive home buyers…and hurricanes too. While this season isn’t expected to be as intense as last year, with a record-breaking 30 named storms — 12 of which made landfall in the continental United States — weather experts are still expecting an active season.

How much risk are you and your property at?

Hurricanes can devastate communities, damage local economies and displace many and take their lives. Storms can also put a heavy burden on the real estate markets.

If you are investing in a coastal market, it is important to prepare.

How many houses are at risk?

Real estate data company CoreLogic evaluated the risk Americans face this year in their annual hurricane report.

According to the report, 31 million single-family homes are at moderate to severe risk from hurricane-force winds and one million multi-family homes are at risk. In addition — and perhaps most dangerously — eight million homes are at risk from coastal storm surges.

While home insurance coverage usually includes hurricane wind damage, flood insurance is usually sold separately. Those in federally designated flood areas with mortgages backed by the U.S. government must have flood insurance. As for other lenders, it’s up to them whether they need a homeowner to get flood insurance or not. If your property is at risk from wind or storm surges, check your insurance policy to make sure you’re covered.

CoreLogic estimates that up to 70% of damage caused by flooding is uninsured. When the numbers are crunched, storm surge damage caused by a Category 5 hurricane alone can cost many billions of dollars, and even more if you factor in wind damage and debris.

Nearly three years ago, Hurricane Florence — Category 4 at landfall — hit the Carolinas. The storm killed 53 people and caused billions of dollars in damage. By September 2020, two years after the storm made landfall, the North Carolina government and FEMA had already spent more than $2 billion on recovery aid and had provided 656 displaced households with free short-term housing.

Based on data from the National Oceanic and Atmospheric Administration (NOAA), the cost of damage from weather events has increased by 70-90% every decade, adjusted for inflation.

Hurricanes are expensive and bring great pain to the communities they devastate. But what happens to the local real estate market when they hit?

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Mortgage debts rise after storms

A majority of Americans don’t have much savings, especially millennials and Generation Z. When a hurricane hits, the economic burden on low- and middle-income families can be as devastating as the storm itself.

One of the first problems these communities face is a lack of insurance. Private mortgage insurance can be expensive and is generally required for most homeowners with less than 20% equity in their home, but flood insurance is separate and adds up. Lower-income communities often lack broad coverage, which can cause a lot of trouble when a storm breaks.

A roof in Lake Charles, Louisiana — a city hit by Hurricane Delta and Laura last year — costs about $8,000 to replace. The median household income in Lake Charles is approximately $43,000 per year. If they don’t get help or insurance money, replacing the roof would take 20% of their annual income. And that’s just the average family. Low-income families are in an even worse position.

The various problems homeowners face when storms make landfall naturally lead to an increase in mortgage arrears. When Hurricane Laura hit Lake Charles, the default rate was already quite high: 9.8% in August 2020. By September, the rate had risen to 16.1%.

Similar jumps were seen elsewhere, such as after Hurricane Michael in Panama City, Florida. The mortgage interest deduction there went from 3.9% in September 2018 to 11.3% in November.

Hurricane Harvey caused significant damage to the Houston, Texas subway in 2017. It also increased arrears from 6.2% to 10.9%.

What happens to the real estate market after hurricanes?

The havoc caused by hurricanes continues to affect the property market in the months following the landfall, also through reduced inventories.

In the two months after Hurricane Michael, housing supply in Panama City fell by 13%. Nearly a quarter of Houston’s real estate inventory fell in value after Hurricane Harvey, and Hurricane Florence caused Wilmington, North Carolina’s supply to drop by 26%.

Hurricanes cause major problems for everyone involved in real estate, whether it’s the homeowner, real estate agents losing their listings, investors needing to repair properties, banks missing out on mortgage payments, or developers losing valuable time on their projects.

How should investors stay prepared?

Hurricanes will always remain a problem, but in recent decades they have become more problematic as their size, strength and frequency increase with sea levels and global temperatures. Going forward, the best way to combat these storms is to use data, architecture and support those in our local communities who need the extra hand.

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