Ten Real Estate and Economic impacts of the LA Wildfires

[AJ Wong]

One week into 2025 and the US housing market is facing considerable new challenges. It goes without saying that the recent and ongoing disasters in California are some of the most devastating and destructive in recent memory. I lived in LA for a decade and we have many friends, family, clients and community members suffering and send our sincerest condolences to all of those experiencing and affected this tragedy. As we’re beginning to get a grasp on the scale of the challenges ahead we wanted to highlight a few areas of note and concern that is already influencing the local and national real estate market.

Insurance : This area of consideration deserves its own deep dive so we’ll briefly highlight key concerns. 

- The underinsured. Those policies that weren’t forced on the plan of last resort, the state run California ‘Fair’ Plan are significantly underinsured. Many likely have coverage for their mortgage balance or from many years ago. There will be a huge gap between coverages and replacement costs.

- Renters are majority uninsured.

- In September 2024 the FAIR Plan had $6B in exposure to the Palisades alone. The plan is notorious for minimum insurance and they were previously capped at $20M for larger commercial and HOA properties. That limit was recently bumped up to a $100M maximum. I heard a story today of a condo owner whose entire complex was lost. They had the $20M in coverage, equating to $400k+\- per unit or less than half the $1M Zestimate. Estimates range from $3-500B of property insured with the FAIR Plan and between $3-700M in liquidity with up to $3B in re-insurance. Post insolvency, the framework allows an assessment to all private insurers operating in the state to cover the difference which will subsequently pass the costs along to policy holders. In other words, individual policyholders are subsidizing the losses.

- Inefficiency with payouts and administration will be compounded as the FAIR Plan has zero experience with a major pay out and lack infrastructure of assessors and technology to distribute the funds they don’t have. Think of the California DMV..

Defaults and Foreclosures : Not yet on the radar for most, is that the existing liabilities and mortgages need to be satisfied…either by insurance pay outs or other means. I’m certain there will be some type of moratorium or intervention, but the fact of the matter is the balance sheets of impacted lenders will suffer when obligations are not paid on time. Not only will lenders be effected, but borrower credit, business loans, inventory, and auto credit will suffer when those effected have to relocate, find long term replacement housing and their livelihoods and income are destroyed. Even large and small businesses with intangible residual services like TV, internet, security, pest control or the local contractor with remodels in process could fall behind on payments revenue contract. 

Legal Implications & Ramifications : As an example; the iconic PCH homes in Malibu and many in the upper foothills might not permitted to build back, certainly not to the same extent or materials. Some of the most expensive and difficult properties in the country (and world) to develop were vaporized into potentially un-developable lots. Regardless of socio-economic status, a significant proportion of wealth is concentrated in prime real estate, especially in these areas. Even if the actual property survived, it often won’t be inhabitable for sometime due to infrastructure, contamination or remediation. Class action lawsuits are already being discussed and there is potential at least portions of the blazes were caused by arson, often excluded from coverages. Many insurance policies also require re-development within two years, a near impossible timeline in a region with the coastal commission, perhaps only second to Manhattan in terms of permitting and red tape.

Local RE Economy : Although proportionately more affluent areas were impacted, Altedena is one of the most diverse constituencies in the State. Those effected go well beyond the property owners, the economic contribution of RE and subsequent economic loss in the form of: management, maintenance, landscaping, caretaking, hospitality, tourism, contracting, designing, pools and gardening is economically catastrophic and will reverberate well beyond specific zip codes.

Wealth Destruction : Luxury properties contain luxury assets. These are some of the most successful people; CEO’s, tycoons, celebs, old and new money and investors on the planet. The loss of priceless art, jewelry, autos, memorabilia and watches could often match or exceed the property values. With a historic proportion of assets invested in equities, markets beyond Real Estate could be influenced.

Job and Talent Loss : The duration of recovery has and will continue to force migration. After the Paradise fire Butte county lose nearly two-thirds of its population. Beyond property owner losses are retailers, grocery workers, dog walkers and all walks of life whom’s livelihood was interrupted. We own a home in Mexico, and our neighbor said their daughter unfortunately lost their home in Altedena. They are nearing retirement and have children in school. They own another property in Michigan and are leaving SoCal this week…permanently. He is a PHD physicist at the Jet Propulsion Laboratory.

Taxes : Taxes have been a brewing crisis nationwide for sometime, Chicago is another prime example of a major municipality struggling under high debt load. Legislators often leverage future obligations in the form of bonds. When the tax base disappears so do essential services. Borrowing costs are nearing their highest point in decades and the municipal and state debt crises do not get nearly the attention of the federal government or deserve.

Environmental Impacts : My assumption is that the entire toxic debris removal process will have to be managed by the Army Corp of Engineers X FEMA and other governmental agencies. In Hawaii the debris was systemically removed, wrapped in plastic and disposed at a 70+ acre site the city acquired. The soil composition had to be tested and cleared before development could begin. Eventually it will rain, the toxic soot will seep into the soil and makes it's way into the rivers and oceans. The contamination will flow well beyond the localized areas and require significant remediation.

Limited labor and resources : Unlike the catastrophic fires in Lahaina Hawaii there are significant resources in Los Angeles to contribute to recover, but quality contractors, tradesman, plumbers, electricians and laborers have long been in short supply. Meaningful home building hasn't occurred in SoCal since the post war era. Replacing the same infrastructure and structures with the same design is unlikely. Lahaina is a year and a half into recovery with roughly 1500 homes destroyed, The US Army Corps of Engineers and FEMA just competed debris removal. There are at least 5-10X that many structures destroyed throughout LA and LA county. The timeline is years for clean up and decades for reconstruction and recovery. This is a hurricane Katrina scale event that I believe will well exceed those costs and downhill economic impacts.

Appraisals, Lenders and Rates : Beyond the transactions that were literally in process (sales, listings, leases, seller carries) are properties that remain amongst vacant lots. What happens to the 'comparable value' if the area is uninhabitable or a community that won't return for years? Local lenders and credit unions could face insurmountable losses to their balance sheets and customer bases as well as the downstream financial and real estate service sector. Inherently, rebuilding in inflationary. Bonds have been signaling risk to markets that interest rates could remain elevated as western countries grapple with exploding debt loads and costs. 

Bonus : Could the 30 year mortgage be at risk? Without predictability on insurability and risk of the primary collateral being destroyed (which at this point theoretically could happen anywhere) as it’s January, and would you believe in 2023 that 71K thousand square miles of northern Canada burned 5% of the entire Canadian forest with billions in damages? Most US mortgages are based on 30 years and without assurance on insurance, why would banks continue to make mortgages in higher risk areas if the potential is complete loss? The borrower will need to be exceptionally qualified and have significant reserves (particularly for a jumbo or super jumbo loans of $1-2-5M++) Historically borrowers could qualify with 10-20% reserves of the amount financed, that could jump to 100%+ without significant state and federal intervention. There is a chance a national wildfire or disaster policy will need to be created, some form of Government Service Entity such as Fannie and Freddie to stabilize the insurance market. 

There are considerable economic headwinds for 2025 including if equity markets pull back, there could be a reallocation of profits into real estate. High level local impacts are rising rents from Santa Barbara to San Diego and high demand for luxury purchases. Migration will accelerate as will second home purchases from those that live primarily in areas prone to disasters. Areas that saw population bumps during the pandemic could see milder but significant demographic shifts, as will almost any area where effected residents have family, relatives or property available for immediate longterm occupancy. On the ground, I've already had a few random feelers for ultra luxury coastal estates here in Oregon and family homes in Eugene from California buyers. There's growing housing desperation to both purchase and sell in markets with pre-existing supply and price constraints.