Hurricane Season Has Arrived—How Should Investors Prepare?

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

How at risk are you and your properties?

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

If you’re investing in a coastal market, it’s important to prepare.

How many homes are at risk?

Real estate data firm 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 of hurricane-force winds, and one million multi-family units stand at risk. Furthermore—and perhaps most dangerously—eight million homes are at risk of coastal storm surges.

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

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

Almost three years ago, Hurricane Florence—Category 4 at landfall—struck the Carolinas. The storm took the lives of 53 people and caused billions of dollars in damage. As of September 2020, two years after the storm’s landfall, North Carolina’s government and FEMA had already spent more than $2 billion in recovery assistance and had provided 656 displaced households with free short-term housing.

Based on National Oceanic and Atmospheric Administration (NOAA) data, the costs of damage due to weather events have increased by 70-90% each decade, inflation-adjusted.

Hurricanes are expensive and bring a lot of pain to the communities that they ravage. But what happens to the local real estate market when they strike?

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Mortgage delinquencies rise after storms

A majority of Americans don’t have much in savings—especially Millennials and Gen Z. When a hurricane hits, the economic burdens placed on low-income to middle-income families can be as devasting as the storm itself.

One of the first issues that these communities face is a lack of insurance. Private mortgage insurance can be costly and is generally required for most homeowners with less than 20% equity in their homes, but flood insurance is separate and adds up. Lower-income communities tend to lack broad coverage, which can cause a heap of problems when a storm hits.

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

The various issues homeowners face when storms make landfall naturally leads to a rise in mortgage delinquencies. When Hurricane Laura struck Lake Charles, the mortgage delinquency rate was already pretty high: 9.8% in August 2020. By September, the rate had climbed to 16.1%.

Similar jumps were seen elsewhere, such as after Hurricane Michael in Panama City, Florida. There, the mortgage delinquency rate went from 3.9% in September 2018 to 11.3% in November.

Hurricane Harvey caused considerable damage to the Houston, Texas, metro in 2017. It also increased delinquencies from 6.2% to 10.9%.

What happens to the real estate market after hurricanes?

The havoc brought by hurricanes continues to affect the real estate market in the months following landfall through reduced inventories as well.

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

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

How should investors stay prepared?

Hurricanes will always be an issue, but in recent decades they’ve become more problematic as their size, strength, and frequency rise with the sea levels and global temperatures. Moving forward, the best way to combat these storms is through data, architecture, and supporting those in our local communities that need the extra hand.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.