By Jeff Gomez, VP of Sales at Vesta Homes
Lots of people here are asking how the 2017 hurricanes in the South will affect builders and home prices in Utah. Our buyers are concerned about it and one of our lenders decided to pass on funding a project for us until he could assess better what the impact from all this is going to be. It certainly adds a degree of uncertainty to the housing market going into 2018, so we’ll try to make some predictions in this blog post.
Catastrophic, Record-Breaking Damage
First, let’s survey the damage. Hurricane Harvey and Irma have been some of the worst storms to hit the United States in over a decade. Flooding and intense winds caused catastrophic damage to southeastern Texas and south Florida. In a building economy that is already strapped for labor and materials, the damage will be incredibly difficult and expensive to repair, and the rebuilding process may last for many years.
While estimated costs for rebuilding after Harvey vary widely, the hurricane is projected to be the costliest natural disaster ever in U.S. history. Estimates put the damage at $190 billion. Damage specifically to homes could amount to $40 billion, according to CoreLogic, a real estate analytics company. In Houston alone, at least 30,000 homes were destroyed and tens of thousands more were damaged.
The damaged caused by Hurricane Irma is slightly lower, probably due to the lesser degree of flooding and the smaller affected area. Still, analysts predict Irma to cost about $100 billion in damage. The damage caused from Harvey and Irma combined amounts to $290 billion, or about 1.5% of the annual GDP of the United States.
An Industry Tasked with Rebuilding
So what actually has to be done?
Flooded homes can be fixed. The most important part is drying out all materials as quickly as possible. The biggest problem is not the water. It is the mold. Drywall will have to be removed and the underlying wood and concrete materials need to be treated with chemicals in a sealed environment. If mold is not treated, people can become sick.
Some homes will require more extensive repairs. Complicating that issue is the fact that lumber costs have increased approximately 23% since spring of this year, mostly due to Donald Trump’s lumber tariff. In addition, the widespread labor shortage could worsen if trades people head to hurricane damaged areas in search of steady work and higher wages.
And with tens of thousands of homes destroyed, a lot of investment dollars will be spent to simply build new homes. This money could come from the federal government, aid agencies, developers looking to create rental units for the displaced, insurance companies, and lenders as people apply for new mortgages. There is going to be a lot of construction going on in the South for the next couple years because of this.
Effects on Utah Homebuyers
Obviously, the home building economy in neighboring areas like Oklahoma, Georgia, and the Bayou states will be more directly impacted, but we should expect to see second-order effects here in Utah. This disaster area will tend to suck up a lot of the available immigrant labor, which is already in short supply. With less workers coming to Utah, sub-contractors will be forced to raise prices, and hence pass that on to the buyer.
While rising lumber costs have already directly affected Utah homebuyers, other building materials, like drywall, flooring, or roofing materials, could come in short supply as demand in the South redirects many of the available materials in that direction. A short term surge in demand for these materials will clearly lead to high prices across the country because most manufacturers sell their goods nationally.
Rising costs in materials and labor have already resulted in higher home prices in Utah prior to these disasters, and many Utahns are being priced out of the market. These factors are putting strain on much needed lower-income and entry-level housing. In my opinion, our government needs to help alleviate the problems by supporting more builder-friendly policies to reduce construction costs, and by allowing and encouraging free-market movement of supplies and labor.
Conclusion: We should expect to see some short to mid-term cost increases in housing because of Hurricanes Harvey and Irma.