Questions loom about the Houston housing market after Hurricane Harvey dumped 9 trillion gallons of water on the city last week. Houston is the fifth-largest metropolitan area in the United States, and the housing market has rapidly expanded there in recent years.
Harvey’s aftermath puts an enormous hurdle in front of all homeowners and renters but will be a particular setback for low-income, minority families recovering from the 2008 housing bust. As policymakers consider the path to rebuilding, here are five facts to keep in mind about the storm’s impact.
(The maps below show the extent of Hurricane’s Harvey flooding in Houston, along with key housing variables. Although the flood maps indicate which areas were hardest hit, not all homes in flooded areas will suffer flood damage.)
1. Homeownership, which is strong in Houston, took a hard hit.
Flooding in Houston was concentrated in areas with high homeownership rates. Thanks to a growing economy and relaxed building standards, Houston has increased its housing stock at a rapid rate in recent years.
Houston has been among the top three cities for new construction. In 2016, Houston’s 44,732 residential building permits put it behind only Dallas. But the number and percentage of flood insurance policies in force have been rapidly declining over the past five years.
Only 7 percent of households are insured, and CoreLogic estimates that 70 percent of the flood damage from Hurricane Harvey is uninsured.
And while the flooding directly affected homeowners the hardest, renters will likely feel the impact as families in need of interim housing increase competition for livable rental units. Prices will likely rise, reducing overall market affordability.
Homeownership rate as of 2015, by zip code
2. Newer homeowners are in danger of slipping into negative equity.
While many of the communities with the highest amounts of accumulated housing equity were spared, many homeowners who were just beginning to build housing equity were hit hard. We may see borrowers who had just a small amount of equity slip into negative equity, as home values drop. For homes that were destroyed or are uninhabitable, or where the homeowner cannot afford to rebuild, equity will be entirely lost.
Flood insurance will play a key role in determining what will happen to home equity. Because traditional homeowners insurance does not cover flood damage, the low rate of flood insurance could lead to substantial losses for homeowners and losses for households just starting to accumulate wealth in their homes.
The Federal Emergency Management Agency offers short-term housing assistance and support for other disaster-related expenses, but qualification for this funding depends on approval of a Small Business Administration (SBA) application and housing inspection. Even if this funding is approved, applicants are often directed to SBA loans to cover the rest of their expenses for long-term recovery.
Aggregated percent of home equity as of 2015, by zip code
3. Harvey hit all areas, all incomes, and all property types.
Unlike Hurricane Katrina, which hit low-income communities the hardest, Harvey flooded low-, middle-, and very high–income areas. Higher-resource communities will likely build back more quickly, which may make for a faster recovery in Houston overall compared with other disaster-struck cities.
Median income as of 2015, by zip code
But the storm will have a long-lasting impact on low-income families, particularly new homeowners who were just beginning to build home equity or those who were not protected with flood insurance and won’t have the financial means to rebuild or repair. Homeowners face rebuilding costs and, in many instances, the cost of temporary relocation.
If properties that were previously not in the floodplain are deemed high risk after the storm, storm retrofitting may be required, and flood insurance will be added to monthly bills. These new costs would be burdensome for low-income families and could lead to missed mortgage payments.
4. The storm hit minorities recovering from the housing bust with a new blow.
Before the storm, Houston was a beacon of hope for minorities, bucking a national trend that had led us to wonder if gains in black homeownership were history. As our Housing Boom and Bust map shows, nationally, originations to minority borrowers have plummeted since the 2008 housing crisis.
But in Houston, new originations to black and Hispanic borrowers hit 32 percent in 2015, a 5 percent increase from 2011. Hurricane Harvey may damper these gains.
5. Borrowers with FHA-insured government loans were heavily affected.
Houston has a considerable concentration of Federal Housing Administration (FHA) loans, and many zip codes most affected by flooding had FHA origination shares between 25 and 50 percent. This concentration of FHA loans could create a strain on the US Department of Housing and Urban Development (HUD), which has announced disaster assistance for victims of Harvey.
This comes as HUD funding faces potential budget cuts, and the overall health of the FHA mortgage insurance fund is just recovering. Given the expected spike in loan delinquencies and defaults that will be part of Harvey’s aftermath, HUD and the FHA will play a significant role in helping Houston homeowners get back on their feet quickly.
This will be a test for the mortgage insurance fund and for FHA loan and loss-mitigation programs.
Percent of 2015 originations that were FHA-insured, by zip code
By offering these views of how the flooding from Hurricane Harvey has affected Houstonians, we hope to help policymakers prioritize the first steps to take in what will be an enormous recovery effort.
To help restore a healthy housing market, HUD must be engaged, flood insurance issues must be addressed, newer homeowners who have lost equity must receive special attention, and efforts toward opening the credit box must continue. All parts of the housing finance ecosystem need to be engaged and responsive and learning from this effort.