Cook: A lot of unknowns, but expect the market to stabilize
(Photo by The Associated Press)
With the recent flood damaging or destroying tens of thousands of homes in our area, everyone is looking for an analysis of how the local real estate market will emerge, how property values will be impacted and so on. The short answer is no one really knows for sure, because we don’t have any market evidence at this point. Not enough sales and lease transactions have taken place to gauge the flood’s impact on property values.
We do know some things. More than 107,000 disaster claims have been filed with the Federal Emergency Management Agency, which estimates only about 15% of the homes in East Baton Rouge Parish and 20% in Ascension and Livingston parishes had flood insurance. However, claims do not represent the total number of homes impacted. The most recent estimate is that 60,000 homes may have flooded in all three parishes.
For the sake of argument, let’s say 80% of those homes—about 48,000—were not insured for a flood. That’s a lot of housing stock. The question that keeps coming up is, will those houses be repaired?
Consider Livingston Parish. The average home price in Livingston is about $180,000, and most homes there were purchased with Federal Housing Administration or Rural Development loans, which require very little down payment, leaving homeowners with minimal equity position. These homeowners likely don’t have cash reserves available to make repairs.
The average size of those $180,000 homes in Livingston is about 1,500 square feet, and if demolition and rehabilitation run $50 per square foot—which many say is a conservative estimate—the repairs would cost about $75,000. If insurance isn’t available, the homeowner then has to get a Small Business Administration home repair loan.
Let’s assume a $180,000 home has a mortgage balance of $170,000. Will the homeowner put up an additional $75,000 for repairs and increase their total investment to $245,000 for a home that’s only worth $180,000? Will they make the choice to be “upside down,” owing more than the house is worth? The pessimist could argue that many of these homes will be abandoned and not repaired. However, other factors must be considered. The SBA loans have low rates for long terms, and it appears they are relatively easy to obtain. Some grants are also available that don’t have to be paid back.
If we think about this on an individual basis: The 35-year-old homeowner in Livingston Parish, with a job and two kids in school, will think about where else they can go. Little housing stock is available, because supply and demand were pretty well in balance before the flood. If the homeowner abandons their home and mortgage, they may not qualify for another home loan for a long time.
Most of the homes without flood insurance should get an SBA loan, and although the homeowner will be upside down, the home will be repaired. I’d expect this will happen with the vast majority of homes in Livingston Parish, as well as in Central.
I’ve heard people compare the flooding in our area to Hurricane Katrina’s devastation on the New Orleans market, but there are dramatic differences. The water stayed in New Orleans for much longer and did far more damage. Many of New Orleans’ major employers moved their offices and facilities to other areas, including Baton Rouge. The New Orleans economy was already suffering, and job growth was stagnant.
That is not the case in the Baton Rouge metro area today. Damage was not significant enough to make employers move, the industrial corridor is still growing and there is no evidence that job growth will slow dramatically. Our unemployment rate, at between 5% and 6%, will continue to drive the need for homes and apartments.
In addition, the Baton Rouge area has not lost basic services, such as hospitals, like New Orleans did. Our basic services, including grocery stores, restaurants and other retailers, have all reopened or are working hard to do so. I drove though the Bass Pro development in Denham Springs, which had extensive flooding, and noticed almost all of the retailers and restaurants were open. The nearby Juban Crossing development also took on water, but it immediately had people working to repair every store. The Walk-On’s restaurant at Juban Crossing has already reopened, about three weeks after being flooded.
I don’t expect a lot of housing stock to be demolished or dumped on the market, or prices to be dramatically impacted. In the short run there will be an increased demand for rental properties, and homes that did not flood will benefit from those folks who chose not to repair, but I believe the vast majority of our housing stock will be repaired and the market will stabilize. How long that takes is anybody’s guess. My guess is we should hit whatever the new normal is in about 12 to 24 months.
Another factor to consider is the permit process for renovations. Local builders will tell you it’s already difficult to get a permit to build in East Baton Rouge, Livingston and Ascension parishes. The East Baton Rouge Department of Public Works already appears to be overloaded, and this will obviously make getting a permit a more difficult and lengthy process.
Will that lead some homeowners to do renovations themselves? That’s a real possibility. A great number of the damaged homes did not lose electricity, so those homeowners don’t have to get an occupancy permit from DPW to obtain utilities. Those individuals can simply demo, repair and move back in.
However, if some repairs take place without proper permits, it may present a problem in the future. Looking forward, prudent buyers and lenders should be checking to see if flooded homes were permitted properly and if proper mold remediation was completed. Both will need to be careful when purchasing or making a loan on flooded homes, which may make them more difficult to sell.
Another factor: How will FEMA determine substantial damage? Some older homes in flood zones may have to raise the elevation of their slab in order to get flood insurance going forward. To what elevation will new homes be required to have their slab built in the future?
The list of lingering questions goes on and on.
In summary, most of the homes that have been damaged will likely be rebuilt. As time goes on people will recognize that this was a flood that happens once every 1,000 years and the market will stabilize. Homes that flooded will have to bear that stigma and may suffer some loss in value. Homes that did not flood will be in higher demand. But by and large, in the end we will be OK.
I am reminded what my pastor Donnie Wilkinson said shortly after the flood: “In the end we will be all right, and if you are not all right, it just means you have not reached the end yet.” The market will be all right in the end, so don’t panic. I think we will all be surprised how fast it recovers and stabilizes.
Tom Cook of Cook, Moore and Associates has been an independent real estate appraiser for more than 20 years.