How will hurricane sandy affect the us real estate recovery?

Photo credit: Dave Bledsoe

$20 billion. That is the estimated cost of Hurricane Sandy, the tropical gale that stormed the Atlantic seaboard last week.

Sandy, a Superstorm that spanned a width of roughly 1,000 miles, battered property along the East Coast of the United States, seriously damaging buildings in major cities and leaving many citizens without homes altogether.

The total cost of all those damages? An estimated $20 billion, one California provider of catastrophic risk models, told Business Week.

Compared to the amount of real estate that was at risk, Hurricane Sandy's fallout could have been even worse. Nearly $88 billion worth of property across seven different states were in danger of the storm's savage campaign, according to CoreLogic.

New York led the way with $35.1 billion of homes at risk of damage, not including the potential impact upon commercial property. Indeed, Manhattan's houses were hardest hit, with up to 40,000 people in New York now in need of housing. Half of those are from social housing.

"We don't have a lot of empty housing in this city," Mayor Michael Bloomberg told Reuters. "We are not going to let anybody go sleeping in the streets. We're not going to let anybody go without blankets, food and water, but it's a challenge and we're working on that."

Officials have been scouring spare apartments and hotel rooms for places to accommodate those left with uninhabitable homes. Indeed, without heating or power, the current housing conditions pose extra danger for local residents, with one passing away due to hypothermia this weekend, according to Reuters, bringing Sandy's North American death toll to a tragic 111.

The impact upon US real estate arrives just as the market's recovery gathered real momentum. Existing home sales were 11 per cent above last year in September, according to the National Association of Realtors. Pending sales were even higher, topping 2011's figures by a margin of 14.5 per cent.

Prices, too, have surged by roughly 11 per cent over the last 12 months, as record low mortgage rates encouraged domestic buyers to snap up real estate, while overseas investors continued to take advantage of high rental yields before prices climbed too high. As a result, inventory of American property has shrunk significantly, with the number of homes lost to foreclosure dropping by 50 per cent since the peak market in 2010. This, in turn, boosted confidence among the nation's homebuilders, pushing housing starts up to 872,000 in September, 15 per cent above August 2012 and a huge 34.8 per cent up on September 2011.

But that momentum may now be drowned out by Hurricane Sandy's destruction. Robert Simons, professor of urban planning at Cleveland State University, predicts that prices of undamaged homes in the region could drop by up to 5 per cent, while damaged homes could see values drop by up to 12 per cent.

"There's going to be an effect," he told US News. "In natural disasters like this, it changes the way that potential buyers look at an area." 

"The hope is that the stigma disappears over time," he added. "If [a disaster like this] happens once, it's going to be bad for a year or two, then hopefully it's going to wear off."

The National Association of Realtors is slightly more optimistic.

Lawrence Yun, Chief Economist acknowledges that there will be an impact, but that it will be localised to the affected areas rather than derail the entire country's recovery. In many of those areas, he notes, housing starts were already sluggish.

 "This will certainly create a negative in the short term," Yun told Forbes. "The bottom line is we clearly anticipate a slowdown, but it will be temporary."

Sellers of property on the East Coast are expected to remove their homes from the market while repairs are made, a trend that could delay or cancel pending sales at a time of year when the market already traditionally suffers a slow down. New home starts will also decrease.

But once the immediate aftermath has passed, there is potential for sales and housing starts to rebound to stronger levels as homes and lives are rebuilt from the rubble.

"With past natural disasters," explains Yun, "home sales pause but what generally happens is in later months, as insurance money begins to flow in, the housing market gets elevated to higher levels than before the storm."

For now, though, the cost is being counted on the streets of Manhattan, where those who have weathered the worst of the storm continue to search for shelter. 10 per cent of New York remained in darkness over the weekend, as power was restored in Lower Manhattan for the first time in days. 80 per cent of the subway service has also resumed service, with schools set to reopen from today.

A housing recovery of an altogether different type continues.