ECON 101
The economic effects of fires on housing and insurance By Robert Eyler
J anuary’s beautiful weather in the North Bay was react. It will take years for those areas to come back in earnest, but they will return. We have seen that recovery here. Both good and bad also await the North Bay, with three focal issues: juxtaposed with multiple disasters in the greater Los Angeles area. The wildfire that became a suburban fire provided memories of fires here in 2017 and 2019, in Paradise in 2018—and climate change is creating a need to
comparison, included is an estimate of the number of homes destroyed in the L.A. fires by the end of January 2025.) Commercial properties have their tragedies, but here we focus on housing units. The figure shows how the counties involved were affected. Note how Butte and Lake counties remain below the pre-fire line (dotted); we should not forget how the 2015 fires in Lake County shocked those communities. While the affected areas are devastated, the larger area will
insurance, construction costs and availability, and shifting regulatory environments. The insurance market now has yet another vector of cost and more uncertainty in the medium term. We should expect major regulatory debate and perhaps intervention. However, insurance companies also have a perspective and concern here. Risks are rising, and insurance companies are built on balancing risk with
not be affected short of the change in demand for construction and the redistribution of residents who lost homes in the fire. The individual tragedies should not be forgotten, and assistance will be needed for some time. After the Fire USA is an organization that was born from the 2017 fires here in Sonoma County. This organization is doing great work (see afterthefireusa.org for ways to get involved).
Housing Units, Selected Counties, Index 2011 = 100, to 2024 (with shock to Los Angeles County estimated at 15,000 homes lost). Source: California Department of Finance and author’s calculations
their pricing. We are moving quickly from economic to social considerations about insurance. The FAIR program in California (one example of many nationwide) will continue to rise as more insurance companies consider walking away from our markets. The position of insurance commissioner will be an interesting position in our state government over the next five to seven years. I am optimistic that insurance entrepreneurship will provide options, but that may be some time to come. The concerns are deep and multi-faceted. Construction costs are going to rise for both rebuilding materials and also for labor. Materials supply chains will move toward Los Angeles in the short term (following profit incentives) once remediation and rebuilding begin. Some North Bay firms may find ways to gain from being a part of that marketplace. Those may be relatively small gains; the greater Los Angeles area, with Orange County and San Diego not too far away, will likely soak up most of the coming demand. However, local contractors may be drawn to the L.A. market as new housing continues to be built across California, competing with fire rebuild. The accompanying graphic shows estimated housing units in Lake, Sonoma, Butte and Los Angeles counties since 2011. (For
It is likely that the main friction will be between regulators and insurance companies that may want to use rate increases to reduce the loss of capital from extraordinary insurance claims. Insurance companies want to raise prices and capital when possible, knowing there are claims and disasters coming in the future. There will be more regulatory change, from how insurance companies can change prices (making that industry marginally more like a utility in California) to how new homes are built (which is already underway) to more concern over how electricity gets to our homes and businesses and what risks run parallel in the face of changing climatic conditions. All these changes mean rising costs of doing business and living in this state, much less the North Bay. Watch closely for these changes and the politics of housing to move more front and center to 2030. g
Dr. Robert Eyler is professor of economics at Sonoma State University and president of Economic Forensics and Analytics in Sonoma County.
March 2025
NorthBaybiz 35
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