How Costly Will the LA Fires Be to the State of California

Cheddar News

Chris Lafakis, Director at Moody's Analytics, predicts the economic impact that the Los Angeles fires will have on the state of California.

Transcript

00:00Presumably hundreds, if not thousands, will not rebuild or will not be able to, will not

00:05be able to afford to rebuild there.

00:09How potentially might this remake real estate and the map, as I suggested earlier, we're

00:13already seeing thousands leave Florida because they simply cannot get home insurance.

00:20Absolutely.

00:22And we saw this happen after Hurricane Katrina, where population declined in the aftermath

00:30of that storm.

00:32In Florida, insurance is becoming more and more expensive.

00:36And as a percentage of kind of the cost of home ownership in Florida, it's one of the

00:40highest five or 10 states in the nation.

00:43And that has led to some out migration.

00:47And I would expect the same thing to happen in California, where you're going to get some

00:52insurance payouts.

00:54Perhaps people take the money and run.

00:57But if they decide to stay, the more expensive nature of the insurance is going to act as

01:05a tax on all the homeowners that live within the state.

01:11And that's going to reduce housing values.

01:14And it's there's also rebuilding challenges because it's hard to to get permits sometimes

01:21to build in certain parts of the state.

01:24There could be labor constraints if we're cracking down on types of, you know, illegal

01:32immigrant workers that don't have documentation that might operate more in the construction

01:38industry.

01:39There are challenges in terms of the supply of labor required to rebuild, the cost of

01:45rebuilding, whether or not you can get permitting to rebuild.

01:49These types of all of these issues kind of combine to reduce the amount of migration

01:56into California and exacerbate migration outflows from California.

02:02So and at the end of the day, economic growth is really the sum of two things, productivity

02:09growth and population growth.

02:11And if California is losing population to other states, then that impacts the California

02:18economy.

02:19And that's a long term issue.

02:20That's not just a short term issue where six months after the wildfires, we were in this

02:26rebuilding phase.

02:27This could impact California's economy for the next five or 10 years or more.

02:33That's what I wanted to ask you about.

02:34We're talking about the U.S.'s largest economy by state by a wide margin.

02:38Not just that, but if California were an economy, it'd be the fifth largest in the world as

02:44a country.

02:45How could this impact the California economy moving forward?

02:50Well, I think that you will see the housing market have less demand for housing, so potentially

02:58lower house prices than would otherwise be the case.

03:02You know, with one wildfire event, you know, I would caution against making it too grand

03:09of a prediction.

03:10But I think that housing values will, in fact, be lower than they otherwise would have been,

03:14especially in the Southern California area, especially in Los Angeles, where there have

03:19been issues with wildfires in recent years.

03:22It ensures and that's why they've been pulling out, because the frequency at which these

03:27natural disasters are occurring has been greater than it has been historically.

03:32And so they're not able to accurately estimate payouts and profitably underwrite policies.

03:38So I think that you'll have lower housing values.

03:41I think you will have more expensive insurance.

03:44That's going to reduce disposable income and it's going to result in outmigration.

03:52So I think that the combination of those three factors will occur.

03:56So lower house prices, more expensive insurance and fewer people staying within California.

04:01And likely some businesses that won't be able to afford rebuilding either.

04:06Much debate today, Chris, about the impact of climate change in either causing or worsening

04:12these California wildfires.

04:14Objectively speaking, where do you and where do Moody's stand on that question?

04:20So we rate different localities based on their exposure to wildfire, to flood, to tropical

04:30cyclone, these types of perils.

04:34And we have scores that are from zero to 100.

04:38And certainly in California, a lot of the metropolitan areas have higher wildfire scores.

04:44So yeah, these are areas that are more susceptible to natural disasters occurring of this exact nature.

04:56It gets worse as temperature increases.

04:59And so if we are in a world where temperature is three degrees Celsius above pre-industrial

05:05levels or even four degrees Celsius above pre-industrial levels, you're going to have

05:09more natural disasters and you're going to have more wildfires in that type of world

05:13than if temperatures are where they currently are, which is closer to one and a half degrees

05:17Celsius above pre-industrial levels.

05:21So I think that our research kind of reflects that.

05:23I think that's a fairly straightforward scientific conclusion.

05:28Boy, it's nice to hear some facts, some science.

05:32This is not about political opinions.

05:35There's certain facts that make this science.

05:38Chris, really appreciate it.

05:40I'm just curious whether to use an analyst or use a human being.

05:43Any thoughts about the best way to support those who have lost homes, who have lost businesses?

05:48Well, I think that as citizens, charitable contributions are our best avenue.

05:55There's institutions out there like the Red Cross that are dedicated to providing relief

06:00to families.

06:03I think that there's certainly things that the state government can do to conduct an

06:09investigation to, and maybe this is done at the federal level as well, if there's

06:13anything that can be put in place, preventative measures to boost our adaptive capacity to

06:20help us be more resilient to types of events like this in the future.

06:24I think that's very important as well.

06:27I'm sure that federal lawmakers will also look at providing aid, federal aid, like we

06:35have for most of the large natural disasters that have occurred since Hurricane Katrina.

06:42So that would be probably another step that we could take.

06:48So really, really a combination of things that we can do, both at the individual level

06:52and as governments.

06:56And hopefully we will all continue to do so.

06:59Moody's analytics director, Chris Lefakis, really appreciate this.

07:02We'll check back in a couple of weeks once we have a clearer picture of the true scale

07:06here.

07:07Really appreciate it.

07:08My pleasure.

07:09Thanks for having me.

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