As residents grapple with the enormity of homes and businesses lost, the economic impact of the devastating Palisades and Eaton fires grows larger by the day.
AccuWeather’s estimate of property and business losses reached $135 billion to $150 billion by Friday, 10 times greater than the deadly Maui file in 2023.
Lives are in disarray. Businesses and jobs are up in smoke. And experts are months away from tabulating the ultimate toll.
Yet, past disasters shed light on the possible impacts to come from Los Angeles County’s multiple firestorms.
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Homeowners, many of them underinsured, face years of anguish as they struggle to find temporary shelter and get claims paid.
Consumers face ever-mounting insurance premiums — if they can get insurance at all — as carriers reassess the risks of doing business in Southern California.
Banks face rising mortgage delinquencies, while municipalities face a groundswell of building permit applications.
But on the flip side, the fires will also stimulate economic activity as displaced residents hunt for temporary shelter and hire building contractors.
More on the fires: Evacuations soar in the San Fernando Valley, Brentwood as Palisades fire enters Day 5
“A lot depends in the future on people’s inclination to rebuild and come back,” said Adam Rose, a professor at USC’s Sol Price School of Public Policy who studies the economics of disasters.
“What will cause people to rebuild is a sense of community, which is very strong in the Palisades area and in the Eaton Canyon and Altadena area,” Rose said. “Local government policy to promote rebuilding and cut through the red tape on housing permits, and government assistance… will help. But what’s going to hurt is a lot of people are going to be afraid about the next fire.”
At $100 billion, losses would amount to more than 10% of LA County’s gross economic output of $962 billion a year, observed Richard Green, chair of USC’s Lusk Center for Real Estate.
Study says: 1 in 10 Los Angeles homes don’t have insurance
“I would call 10% of GDP enormous,” Green said. “If it’s $50 billion, it’s (still) enormous. A good year of GDP growth is about 3%. So, at minimum, you have wiped out more than a year of GDP growth.”
Still, in the grand scheme of things, even the county’s biggest firestorms on record won’t put too much of a dent in the world’s 19th largest economy, some economists said.
If the number of homes destroyed were to reach 15,000, that would still represent less than half of a percent of LA County’s 3.7 million housing units.
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“What you see in the context of disasters is a very short-run decline in activity, then a big bounce back to normal,” said Christopher Thornberg, founding partner of consulting firm Beacon Economics. “People get up, they dust themselves off, and they go about their lives again.”
If people have a mortgage, they have insurance and will have some coverage, Thornberg said.
“They’re going to continue to live their lives and do their work, and that’s what’s going to keep the economy going.”
Insurance gap
The fires sweeping across Los Angeles are on track to cause about $20 billion to 25 billion in “insured losses,” said Jonathan Schneyer, research and content director with CoreLogic’s Insurance Solutions Group. And that could “grow substantially” as the fires spread.
Yet, insured losses represent only about 40% of total property damages, Schneyer said. “That difference is what we refer to as the insurance gap,” he said.
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A 2023 study by the Federal Reserve Bank of Philadelphia found that 42-66% of California homeowners affected by wildfires over the past 11 years were underinsured.
And four out of 10 of the state’s wildfire victims received less in their insurance settlement than they were entitled to get, the study found.
Even homeowners with adequate policies will have to pay deductibles, meaning their coverage may not pay for all of their losses.
“On average, insurance will not make them whole,” Green said.
The insurance gap likely is worse today than before an explosion in wildfire severity sparked soaring premium hikes and policy non-renewals. Fourteen of the state’s most destructive wildfires occurred since 2017.
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A decade ago, 90% of homeowners had fire coverage, said Rose, the former director of USC’s Center for Risk and Economic Analysis of Threats and Emergencies.
Today, he estimates that 70-80% of homeowners have coverage.
Apart from insurance, banks worry about people not being able to pay their mortgages on time or defaulting on their loan altogether, Schneyer said.
The Philadelphia Federal Reserve study found that 90-day delinquencies were 4 percentage points higher for California properties damaged by wildfires.
Homeowners may not have enough to pay their mortgage after dipping into savings to pay for temporary housing or living expenses, Schneyer said.
“Try putting yourself in the place of someone who just evacuated on a moment’s notice, who may have lost their entire home,” he said. “The last thing you want to be thinking about is your mortgage payment.”
Surging rents
Meanwhile, rent and possibly home prices will rise as displaced households fan out into adjacent neighborhoods looking for shelter. Demand also will soar for hotel rooms and short-term rentals.
“We know there’s a chronic shortfall of housing in the region and the state as a whole,” said Robert Kleinhenz, director of Cal State Long Beach’s Office of Economic Research. “Clearly, this loss of existing housing in these various communities is only going to make a bad and chronic situation somewhat worse.”
Rental vacancy rates could drop, and average rents could rise as much as $200 to $300 month, if the loss of housing gets worse, Green said.
“There are a lot of well-to-do people who are going to be looking for rental property now, and landlords know that,” added Rose.
So, they’re likely to raise their rents, possibly displacing their current tenants so they can charge more.
“That would be a terrible outcome, but it could happen,” Rose said.
Building boom
Offsetting the losses will be a boom in economic activity as insurance payments go out and as homeowners start to rebuild, economists said.
Rebuilding 10,000 homes amounts to 41% of the 24,000 homes built in LA County each year, increasing building costs and putting a strain on the construction industry, economists said.
“You call the contractor and say, hey, I want to build a home here. He might say, I got a four-month lag before I can start,” Rose said. “It’s going to double the time it’s going to take to rebuild. Then that’s going to put off construction of someone else’s house down the line.”
Homeowners likely won’t have “long-winded fights” with planning commissions to replace demolished homes, added Beacon Economics’ Thornberg.
“You can bet your bottom dollar crews will be coming in here. It’s not going to just be local labor force,” he said. When “they have a hurricane in Florida, every contractor from Des Moines to Portland, Maine, head to Florida for the work. So (contractors) will show up to take advantage of the opportunities.”