Will Katrina Sink The Housing Market?

Jonas Max Ferris
The Great Miami Hurricane of 1926 was more than one of the very worst natural disasters in U.S. history in terms of lives lost and property destroyed — it changed investor’s attitudes about real estate investing. Katrina could have a similar sobering effect on the more speculative parts of the hot housing market.

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If the ’26 hurricane, also known as the “Big Blow,” hit Miami today after decades of rapid population growth, it's estimated the damage would be over $100 billion — well into Katrina range — not the mere couple billion or so of inflation adjusted dollars it cost then.

At the time, Florida was at the tail end of a real estate boom, arguably the only true speculative bubble in U.S. real estate ever. It was not uncommon for land prices (often subdivisions of subdivisions and occasionally underwater) to double or even triple in price in a few months as wave after wave of highly leveraged speculator latched on to Florida real estate as being a “can’t lose” investment opportunity. Today’s mere 50% - 100% rise in Florida condos over the last five years seems quaint in comparison.

While the insanity peaked in 1925, it was the hurricane in September 1926 that shook some sense into the market.

While market professionals like to say how investments are priced efficiently as investors analyze mountains of news, growth rates, earnings estimates, and the like, in practice the bottoms and tops of market cycles are often created by events that get everyone talking.

The Internet stock boom was largely from a couple big early success stories like the Netscape IPO — stories of near instant riches and rapid growth that made it all seem possible.

What often kills the cycle is not a rational analysis of the economy or tech spending, but stories of fortunes being destroyed as quickly as they were created. Yes, you can lose money in an instant too.

The Florida Hurricane of ’26 proved to the country that real estate is not always a can’t-lose, tangible investment or “hard” asset. Investment property — which most of Florida buying was in the early 1920s — could get destroyed or flooded in an instant.

As it turned out, northern media over-hyped the destruction from the hurricane of ’26 and scared people away from Florida for some time. The lost investment capital and tourist dollars caused Florida to fall into a deeper depression than most of the country suffered.

There are plenty of reasons a hurricane of Katrina’s impact — a once-in-a-generation occurrence — can hurt real estate prices nationwide.

1. Interest rates could climb as the government borrows hundreds of billions to clean up after Katrina.

2. Energy price increases from the Katrina related supply shock may drag the economy into recession.

3. Mortgage defaults from homeowners with homes underwater (literally and figuratively) could spook the mortgage bond market, cutting off new capital to homebuyers.

4. Rising insurance premiums resulting from hurricane losses could increase the cost of owning a home thereby lowering the value of a home.

5. Fare increases from airline fuel costs could increase costs of visiting vacation property.

6. Excess demand from massive construction projects in Katrina ravaged areas could lead to building materials and other commodity price increases as well as labor shortages creating inflationary pressures on the economy

On the flipside, tens of thousands of homes effectively just disappeared from the market. This cut in supply could support home prices in much the same way 9/11 supported office rents in New York by way of reducing supply of office space.

But these economic considerations may not play a key role in housing prices any more than P/E ratios did in the dot com bubble. By now we’ve all heard stories of ordinary people making hundreds of thousands of dollars in real estate in a few years if not months. These stories are the real fuel behind the hot real estate market as much or even more than low interest rates.

With Katrina, these stories passed around the watercooler may turn to stories of fortunes lost overnight.

On a regional level, Katrina may permanently change the makeup of New Orleans in much the same way as riots accelerated the flight to the suburbs of Detroit, leaving the city a shell of its former glory and with only a 1920s level population. Some residents and would-be residents in New Orleans may not want to live in an area that so easily can fall into every-man-for-themselves chaos.

On a national scale, people may reassess their investment value of real estate in general. A home doesn’t look like a can’t-lose investment anymore when all you see is a roof poking out of the water, a few lone timbers and rubble by a mailbox, or looters with guns rummaging about.

Jonas Max Ferris is a regular contributor on "Cashin' In" (Saturdays at 11:30am ET and Mondays at 5:30am ET) and is co-founder of MAXfunds.com .