Hurricane Katrina has an Impact on Building Materials and Prices

The full extent of the impact of Hurricane Katrina on the overall economy and on the housing market is still unclear, and the immediate focus is properly on human life and health, but the number of homes destroyed by this catastrophe is almost certain to dwarf the losses from any previous U.S. natural disaster, according to economists for the National Association of Home Builders (NAHB). Past experience, together with the visible devastation, provides some basis for projecting the effects on construction activity, the supply and cost of building materials and construction labor, and other implications for the housing market.

The number of housing units destroyed (made uninhabitable and beyond economically-justified repair) by Hurricane Andrew in 1992 was estimated at more than 28,000. The combined effect of Hurricanes Jeanne, Ivan, Frances, and Charley in 2004 was almost as large, with nearly 27,500 housing units destroyed, according to estimates compiled by the American Red Cross. In those cases, most of the destruction was caused by winds or the immediate force of the storm surge. The number of homes with major but repairable damage was more than twice the number destroyed.

Katrina also caused widespread immediate damage in Louisiana, Mississippi, and Alabama, but the flooding in New Orleans, Mobile, and elsewhere is likely to translate into much larger numbers of homes destroyed. Although the floods generally did not tear off roofs or walls or cause structures to collapse, many homes will be permanently uninhabitable, according to NAHB. The flood waters carried contaminants that cannot easily be removed, and even if the water were clean, prolonged submersion would cause structures to be damaged beyond repair. This is likely to be the fate of a large share of the more than 200,000 homes in the city of New Orleans.

Of necessity, rebuilding will have to wait. The immediate need will be to clean up and repair damage to structures that are still viable. The repair process will absorb much of the construction labor near the affected area and several key materials that would otherwise have been used to build new homes, according to the economists. The materials that will be most affected include roofing and wood panels (plywood and OSB). Demand for other materials, such as concrete, is likely to decline initially, as planned projects are cancelled or delayed during the initial recovery period.

The economists predict that the storm will have impacts on the supply of materials as well as demand. The areas affected by the storm have a significant number of wood product facilities that may have been damaged or destroyed. On the other hand, trees that have been blown down will need to be harvested on an accelerated basis, perhaps helping to lower wood product prices in the medium term.

Additionally, imports of building materials will be disrupted by the damage to port facilities, they say. New Orleans was the top destination for imports of cement and a number of other building materials into the U.S. in 2004. Congestion caused by diversion of shipping to other ports will also probably disrupt some supplies of materials, as will land transportation problems caused by damage to roads, rail and reload centers.

From July 1992 to September 1992, largely as a consequence of Hurricane Andrew, the average price for plywood increased from about $222 per 1,000 square feet to $321, and the price of Southern pine framing lumber rose from $264 per 1,000 board feet to $308. The hurricanes in 2004 did not trigger a similar increase, and prices actually fell during the relevant period, after soaring during the preceding year. The combination of greater (partly speculative) demand and disrupted supply produced a spike in lumber and panel prices in the final days of August 2005. With production already running at full capacity for wood panels, further increases for those products, as well as for roofing, are likely.

Although the loss of tens of thousands of homes implies increased demand for, and construction of, new homes, past experience has shown that there is no massive surge in home building in affected areas. Replacing units destroyed by the storm will not begin for many months and will take place slowly, over a number of years.

In Miami-Dade County, the number of residential permits was 9,026 or 7.8 percent of the state total in 1993, the year following Hurricane Andrew. That share of the state was slightly lower than the county's 7.9 percent share in 1991. By 1995, there was an increase to 14,718 or 12.0 percent of the state, but that number still wasn't much greater than what might have been expected if there hadn't been a hurricane.

The experience in other areas, such as Alameda County, Calif., following the 1991 fires and Charleston, S.C., after Hurricane Hugo in 1989, was similar. Homes were rebuilt or replaced very slowly, according to the NAHB.

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