The Fires, the Economy, and Housing

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Monday, Oct. 29, 2007 | The fires that have swept the region, and that still burn in some places, have been incredibly dramatic in their impact on the day-to-day functioning of our city and have been absolutely devastating to those families who lost their homes. But when people have asked me in recent days how I thought the fires would impact home prices, my answer has been that it wouldn't have much effect at all.

It's simply a matter of scale. San Diego is a huge city and -- without minimizing the catastrophic impact to those involved -- the number of homes destroyed represents an extremely small portion of our housing stock.

Rich Toscano

The latest estimate I've gotten from the U-T's fire blog as I write this is that 1,470 homes have been destroyed. According to SANDAG, 1,470 homes represent just 0.13 percent of San Diego's total housing supply. I imagine most of the homes burned were single family homes, but even still, the number of homes destroyed accounts for just 0.22 percent of all single family homes in San Diego.

Of course, pricing impact would result more from changes in for-sale inventory than in the overall housing stock. Here too, though, the fire's impact is minimal. If immediately replaced from resale inventory, the homes destroyed would in their entirety use up just 11.1 percent of single family homes currently listed for sale. This would just get the amount of inventory back to where it was in May -- not a significant change and not anything that would change the market's prevailing trend.

It's instructive to look at how the loss of these houses would change the relationship between supply and demand. In September, there were 12.2 months' worth of single family homes listed for resale. This means that at last month's pace of sales, it would have taken 12.2 months for every home to be purchased. An immediate removal of 1,470 homes from the inventory would reduce the amount of inventory to 10.8 months' -- still quite a bit worse than anything we've seen in years. The difference between 12.2 months' worth of inventory and 10.8 months' simply doesn't amount to much. Both figures are ominous for pricing; one is just slightly less so.

I will throw out one last figure. North County real estate broker Jim Klinge informs me that 7,835 homes listed for resale are currently vacant. (This figure counts both single family and attached homes). Every family that lost a home could move into one of these residences and there would still be 6,365 empty homes in San Diego waiting to be sold.

The point of all this is to demonstrate that despite their enormous human impact, the homes lost in the fire pale in comparison to San Diego's oversupply of for-sale homes when it comes to determining future home prices.

Incidentally, the above stats only include resale houses. They do not include the many newly built homes sitting on the market.

The calculations also assume that displaced homeowners would immediately go out to buy a new house, thus taking a home off the market. But in many cases this won't happen. Insurance will reimburse owners for a home's replacement cost, not the entire purchase price of the house and the land. The owner ends up with the same mortgage payment as before, an empty plot of land, and just enough money to rebuild and refurnish the house that was there. In many cases, the owners won't be able to afford to buy a new home -- they will have to rebuild the old home and rent in the meantime. So the decrease in for-sale supply will almost certainly be smaller than what is represented in the examples above.

The above thoughts concern the potential reduction in housing supply without assessing the fires' impact on demand. I've heard many people opine that the fires will be stimulative to local economic activity, which if true would tend to boost housing demand. It's not that simple, however. There are a lot of crosscurrents at work, and I will try to very briefly cover some of them.

To begin, when assessing the economic consequences of the fires (or anything, for that matter), it's important to account not only for the economic activity that results, but also for the thwarted economic activity that would have taken place had the fires not happened. Structures will be rebuilt with insurance or government aid money that comes from other regions, so in this case the thwarted economic activity -- that which the money would otherwise have been spent on if not for the rebuilding, in other words -- takes place outside our city limits. The rebuilding efforts will thus be a regional net positive for near-term economic activity. This boost will probably not be terribly large, but it will certainly provide a shot in the arm to some sectors, notably the faltering construction industry.

On the other side of the ledger, the enormous cost of fighting the fires and evacuating a huge portion of the county will most definitely thwart its share of economic activity. The money and resources that went into this tremendous effort are now unable to be spent somewhere else. I don't really know how the money spent fighting the fires stacks up against the insurance and aid money that will flow into San Diego, but it's surely significant.

Factors outside the overall economy could affect demand as well. Some people may think twice about owning a San Diego home after this, especially at current prices. This would be more of an issue in the areas that were hit by the fires, but then again that's where the homes were lost, so the decreased demand in those areas could offset some of the reduction in supply. Insurance costs could also rise as a result of the fires, rendering home ownership less appealing from a financial standpoint.

My estimate is that the many post-fire economic factors pushing against one another will not amount to much within our sizable local economy. The fires will accordingly not lead to a significant increase in housing demand, and as described earlier in the article, the lost homes represent a small portion of San Diego's oversupply of for-sale housing. The numbers simply do not support the idea that the fires will have much direct impact on home prices one way or another.

My thoughts and sympathies go out to those who lost homes or, worse, loved ones.

Rich Toscano is a financial advisor with Pacific Capital Associates*; he also writes about San Diego real estate at Piggington's Econo-Almanac. Contact him at rtoscano@pcasd.com.