Most of the time, when the damage is totaled after a natural disaster such as a storm, it’s measured in damaged property and insurance claims. What sometimes gets left out of the equation is the amount of debt that is affected by the disaster, namely, mortgages.
The initial damage after the hurricanes was big news at the time, but things are a lot quieter on that front today. That’s unfortunately because we’re experiencing a calm before the storm, to use an unfortunate turn of phrase. We’re going to have a problem very soon, and it’s going to revolve around debt.
Try these figures on for size: around 4.8 million mortgaged properties were in the paths of Hurricanes Harvey, Irma, and Maria, and they represent nearly $746 billion in unpaid principal balances. Towards the end of 2017, the number of loans that were more than 30 days past due rose 48% in areas affected by Irma and a whopping 67% in areas affected by Harvey.
This may very well portend a coming wave of foreclosures. What does that mean, and how does it affect the housing market in general?
As a practical matter, natural disasters undoubtedly create conditions that might precipitate foreclosures, but whether or not they actually cause foreclosures on a case-by-case basis is dependent on a lot of different factors, mainly the current financial state of the homeowner; whether or not they’re current on their payments; the extent to which they may face a loss of income on top of damages that aren’t insured; the regulations governing both their mortgage and insurance.
Why would we be expecting a wave of foreclosures now? For most borrowers, their lenders offer grace periods if their homes are located in disaster zones. The problem is that those grace periods are finite (usually 90 days), and trouble begins when they run out.
If you look at the timeline between the recent hurricanes in 2017 and now, we’re pretty much around 90 days. So economists are expecting a shock to the market fairly soon.
Why is this such a big deal anyway? Can’t most homeowners get repairs done or file insurance claims within 90 days? Sure, most can. Many can’t, though. Let’s assume a homeowner didn’t suffer a job loss due to a hurricane, but their home is uninhabitable. At this point, 90 days later, they may very well be shouldering their mortgage and paying rent to live somewhere. It all depends on their insurance and lender’s policies.
Plus, mortgage servicers tend not to release insurance payments until homeowners have a contractor lined up to make the needed repairs. Not only is that a challenge in and of itself when you have to worry about moving your family or making immediate adjustments to deal with damage, it’s made worse when construction companies have long waiting lists due to a surge in demand (obviously), yet at the same time you need money immediately in order to clean out your home and avoid further damage, or to temporarily move elsewhere.
It’s kind of like when you first entered the job market: you needed experience to get that first job, but you needed a job to obtain that experience. Many homeowners find themselves in this exact sort of catch-22.
So what does this mean for the market as a whole? Does it mean a total meltdown in states hit especially hard by hurricanes last year? Not really. New England states experienced a notable slowdown in their real estate markets after Hurricane Sandy in 2012, but as a whole they’re as robust as they ever were during the recovery these days, if not more so.
Again, the extent to which natural disasters may cause foreclosures in particular cases is dependent on the factors we mentioned above, plus the severity of the event and the actual damage it causes. Far more obvious is the fact that natural disasters tend to create conditions that precipitate an increase in foreclosures in general, but less predictable is the degree to which they actually do in a measurable way, again based on those same factors.
If that sounds complicated, that’s because it is. And it’s only going to get worse from here, because while natural disasters like hurricanes tend to cause a great deal of economic grief in the short term, the overarching trend is that they tend to lead to economic growth over the long run.
It’s an unfortunate economic rule that, much like a major military conflict, natural disasters tend to foster long-term economic growth even if they’re devastating at the time. The reason for this is pretty simple: when something is destroyed, you generally build a new one, and you’re probably going to build it better. In an extreme example, if the majority of an airport is destroyed, that would be a huge economic blow to an area or even an entire state. Once it’s rebuilt, chances are it would be a little more efficient than the 40-year-old infrastructure and design it replaced.
And let’s go deeper – say a road is washed away. Someone has to rebuild it, and they have to be paid. Materials have to be bought and shipped. Even if the laborers aren’t local, they’re still going to spend money in the area. The new road, apart from the immediate economic benefits of its construction, then lends long-term benefits as it facilitates efficient commerce. Maybe there are fewer potholes, and thus fewer maintenance costs for motorists, government vehicles, and trucking companies. There might be fewer accidents thanks to a modern design. You get the idea.
So the takeaway here is that natural disasters cause a lot of short-term pain, especially for ordinary Americans. What they don’t do is spell economic doom (quite the opposite, in fact).
The latter probably isn’t much comfort to the homeowner who returns to their property after a storm to find it under five feet of water with a tree where their kitchen used to be. Sure, they’re glad they evacuated, but what are they supposed to do now, especially when their insurance company and lender are being obstinate? What can you do to mitigate some of this risk?
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