Tuesday, September 06, 2005

Hurricane Katrina Effects on the Housing Bubble

So what will Hurricane Katrina's impact be on the housing bubble? Will it be a factor in prolonging the bubble or will it help pop the bubble ?

Reasons Katrina would be a factor in prolonging the bubble:
  • hundreds of thousands of homes were destroyed. Thus supply has been reduced and hence that causes upward price pressure
  • Building materials increase in cost due to increased demand thus causing upward price pressure on new homes.
  • The Fed decides Not to raise short term interest rates this month because of increased economic risks due to the hurricane
Reasons Katrina would be a factor in popping the bubble:
  • People view housing as a more risky investment due to an enhanced awareness of natural disasters.
  • Gas prices continue to remain high. People have less money to spend on housing.
  • Economy suffers due to the hurricane.
Overall, I maintain that the hurricane is a negative factor for the housing boom.


  1. I disagree that the hurricane will adversly affect the housing market. I believe that the fed will stop tightening in the short to mid term - thus keeping mortgage rates stable. I also believe that building materials will see a significant increase in pricing. Of course this will harm home builders who have sold units with delivery 6 to 18 months out. New contracts will reflect higher construction costs and, I believe, this will put upward pressure on prices of existing homes. Those who have contracts for purchase of new homes with delivery months out will almost certainly benefit.

  2. David, one more comment regarding your statement that housing will be perceived as risky due to natural disasters - FLOOD AND WIND INSURANCE!!! I have 3 properties in southwest florida and sleep like a baby.

  3. how are those rates on your insurance in SW florida?

  4. I don't think the Fed will raise rates this time either while they are assessing the economic fallout from Katrina. But then this recently occurred to me: It seems to me that the last thing the Fed might want is to see rampant housing price inflation hit the houses being built/rebuilt in New Orleans. What do you think of that? Would the Fed even care? How might they act if they do care?

  5. Tough call as if the Feds will raise rates this month.

    "It seems to me that the last thing the Fed might want is to see rampant housing price inflation hit the houses being built/rebuilt in New Orleans. What do you think of that?"

    The Feds have little control over this ( unless they raise rates a ridiculous amount; they won't). Hopefully, rampant price inflation will not occur.

    "Would the Fed even care?"

    They might care. But have very little control unless they do something extreme (which they won't).

  6. David: my insurance premiums are high (as much as 3K for my beachfront property). This is just one item that must be included in the equation when crunching numbers and deciding whether to purchase. On the other hand, property taxes are quite low. I have most of my property in Northern Virginia. I have been an investor for almost 25 years. I just wanted to make a specific comment on the "natural disaster" aspect of your analysis. p.s. - enjoy this site. just started reading it last week.

  7. Welcome to the site. Tthanks of for your information. :-) There is much I learn from my readers.

  8. In my opinion despite signs of cooling, housing is still in a bubble that is still inflating- the worse thing the fed could do would be to stop raising rates- this would add more fuel to the fire and make this situation even more lethal.

  9. Rates will be raised at the next meeting, however, there will be language included that will say something like "the economic recovery is still strong, but we will have to watch closely over the next few month what effects hurricane Katrina will have on the economy". Greenspan already has very little credibility with bond invester, and if he doesn't want an exacerbation of his "connundrum", he must push forward.

  10. Rates will be raised at the next meeting. Greenspan is finally acknowledging the existence of the housing problem and raising rates is one of the few things he has in his power to "hopefully" tame it. If this problem is left to grow, the Katrina disaster will have a strong contendor in terms of disasters when the negative financial effect of the bubble takes hold of America.

  11. One thing noboody seems to be accounting for is that the housing lose is in the south. Most southern states are not frothy housing markets (with the exception of FL). In fact I think most of the displaced people will end up in Texas, a place with some of the lowest housing increases in these past few bubble years (and lots of land ready for development).