The wildfires raging across Los Angeles are setting the scene for a real estate nightmare.
Thousands of homes and other structures are destroyed and hundreds of thousands of residents have been evacuated at various times. Many will not return for months, if ever. Homeless in an instant, they are now flooding the housing market, desperately seeking shelter.
The Los Angeles housing market is poorly equipped for this crisis. It is already one of the nation’s most expensive markets to buy or rent a place to live, largely due to a significant and growing shortage of affordable housing. That shortage will become only more dire with the destruction of so many fire-ravaged buildings.
For the past two years, I have been studying the effects of natural disasters like this one on rental housing markets. As a professor of real estate, I have analyzed the question from a distance, sifting through data.
This time, however, as a resident of Pasadena, I have seen the carnage up close. I watched the Eaton Fire spread across the mountains from my back porch. I helped friends evacuate before their neighborhood was consumed in flames. Now, they’re sitting at my dining table as they process what they’ve lost and search for a new place to live.
Unfortunately, from my research, I have no doubts about what comes next.
Why disasters drive up rents
Scarcity is the enemy of affordability. This is one of the central tenets of economics. When too many people chase too few goods, prices rise.
So, you might expect that a natural disaster, which destroys housing and inundates the remaining units with new renters, would drive up rents, at least in the short run.
That is exactly what my research has found – but it’s not just the short run.
Two years ago, I worked with a team of researchers to prepare a report for the Brookings Institution, where we compiled a database of natural disasters across a variety of major markets throughout the country from 2000 to 2020. We measured the change in rents in places such as Atlanta, Detroit, Miami and San Francisco that landlords were asking for apartments in disaster-impacted neighborhoods. We then compared those cities with similar neighborhoods that weren’t impacted by the disasters.
We found that natural disasters increased rents during those two decades by 4% to 6%. That means rents were at least 4% higher than they would have been in the absence of the disaster.
These rent hikes were especially clear and pernicious after wildfires in California.
These weren’t just short-term effects. It took 18 months for the full effects to be felt in the market, and they never fully went away. Even four years after the disaster, renters were still paying 2% to 3% more than they would have been without the disaster.
In short, we found that disasters permanently change rental housing markets. They eliminate older, affordable housing, allowing developers to build newer, higher-end and even luxury housing in its place. Those changes drive up insurance costs, and the disasters motivate cities to adopt stricter building codes that in turn add to construction costs for the sake of weathering future disasters better.
How much rents increase, however, depends on how communities and the authorities respond to the disaster.
Josh Edelson AFP via Getty Images
Federal aid can slow the growth of rents
We found that rents did not grow as fast when the government stepped in to help.
Specifically, we investigated markets where Congress had used the Community Development Block Grant Disaster Recovery – CDBG-DR – program, providing grants through the Department of Housing and Urban Development. This federal funding typically comes with strings attached and “rental requirements” often mandating that a significant portion of the money be used to build affordable housing.
At least one of these disaster relief grants was issued every year from 2003 to 2020. In some years, Congress allocated as many as 27 different grants across the country to different disaster-impacted areas.
In these markets, we found that rents still rose after disasters – but at a significantly slower pace than in the markets where Congress didn’t send these disaster relief funds.
We dug deeper into several case studies in 2024 to understand why the CDBG-DR program is associated with lower rent hikes over the long run. In this new study, we found that housing markets that benefited from these disaster relief grants were able to build more rental units, easing the housing shortage. They improved affordability by tackling the scarcity problem directly.
Rental units were the key to solving the rent crisis. These cities, where affordability was better post-disaster, didn’t build more single-family homes than the other cities. They built more apartment units.
In these markets, these disaster relief grants saved the average renter between $780 and $1,080 in annual housing costs in 2023.
We believe that this finding shows why it is important not only to rebuild the houses destroyed in disasters like the Los Angeles fires but also to create new rental opportunities in all kinds of housing.
Hope in the aftermath
Here in Los Angeles, the clock is already ticking.
News reports are mounting of landlords raising rents to eye-popping levels.
Fortunately, there are government policies and programs that can help Angelenos find shelter today and that may help the Los Angeles housing market not get even less affordable tomorrow.
Anthony W. Orlando receives funding from Enterprise Community Partners.
