Fires Will Boost Home Construction Business

Oct. 26, 2007 — -- The devastation is enormous, the financial and emotional trauma is gut wrenching, but the California wildfires of 2007 will likely be only a blip on the region's real estate landscape.

Economists and real estate agents say there's actually going to be significant economic benefit from rebuilding after the fires, and the price of most homes in Southern California is unlikely to change.

There is no silver lining for the thousands of people who are now homeless. However Jim Gillespie, president and CEO of Coldwell Banker Real Estate, said that while a lot of homes were damaged, the fires did not destroy an entire region in the way that a large hurricanes can.

"Usually an economy becomes stronger because of rebuilding," Gillespie said.

While the real estate market recovers from the fires, another dark cloud looms, particularly for the Los Angeles area. The people who write Hollywood's movies and TV shows are increasingly likely to go on strike. If it happens, many in the business believe the walkout will go a while, and that will mean hardship.

Though there is an excess amount of housing stock in the region, but Gillespie said the number of homes destroyed won't make much of a difference.

"It's not more than a day or two [of] inventory," he said.

Renters Beware

The area most likely to be effected is the rental market.

Many displaced families will likely want to live near their destroyed homes. That is going to cause a shortage of rental units and probably a spike in prices.

John Hickey, president of the Pasadena Foothills Association of Realtors, said in an e-mail that, "the immediate horror and privation that people see on the news will obviously distract potential homeowners during and immediately after these disasters."

"There will be some people who won't want to return to an area that has suffered from one of these fires. Others, who have considered moving to an affected area, will change their minds. These considerations are usually very localized and involve such a relatively small number of people that any effect it might have will probably be short-lived."

Nearly 2,000 homes have been destroyed this week and the damage exceeds $1 billion. While the numbers are staggering, and likely to go up, the fires will benefit builders and home-supply stores that have seen a downturn in business after the wave in defaults on subprime mortgages.

Professor Stuart A. Gabriel, who heads a real estate studies center at UCLA's Anderson School of Management, said that the likely rebuilding of homes will employ a substantial number of construction workers who lost their jobs in the last few months.

"Some of this excess labor will go to toward the massive rebuilding that is required," Gabriel said.

Sales of building materials such as lumber, nails and windows will also increase, he said, as well as sales of refrigerators, dishwashers and other appliances.

For the most part, Gabriel said, people will rebuild. He doesn't expect any type of mass relocation.

"People really do like California a lot and really do view these events as idiosyncratic and not likely to happen again in the same area," he said.

The fires are likely to cost insurers between $900 million and $1.6 billion, according to Risk Management Solutions, which sells catastrophic event insurance.

The Oakland Hills fires in 1991 remain the most expensive in the state's history, with insurance claims totaling between $3 billion and $4 billion in today's values. In October 2003, an outbreak of wildfires that struck similar areas in San Diego and throughout Southern California caused $2 billion to $2.5 billion in losses, according to Risk Management Solutions.