Hurricane Sandy Steals the Spotlight

11/05/2012 by Alex Carrick

There are a number of events vying for the spotlight at this time of year. First, there’s Halloween. Then there’s the American Thanksgiving Holiday scheduled for late in November.

Don’t forget the U.S. Presidential election on November 6th. It’s been the non-stop media event for the past six months.

But Mother Nature wasn’t about to be upstaged. She threw Hurricane Sandy at the U.S. east coast and all else was forgotten for at least a week.

Before proceeding with an analysis of Sandy’s impact, let’s look at one of the most important indicators for U.S. residential market – the S&P Case Shiller existing homes price index.

Delve deep enough and all aspects of the economy are related in one way or another. Storm damage and residential real estate are no exceptions.

The S&P Case-Shiller existing homes price index in August recorded another step in the right direction for the U.S. housing market. Resale prices rose 0.9% for both the 10- and 20-city composite indices.

19 of the 20 cities recorded month-to-month gains. Only Seattle declined (-0.1%). The biggest month-to-month upward jog occurred in Detroit (+2.3%).

The other cities with the fastest month-to-month changes were Atlanta (+1.8%), Phoenix (also +1.8%) and Las Vegas (+1.6%),

On a year-over-year basis, the 10-city composite was up 1.3% and the 20-city composite, +2.0%.

On a year-over-year basis, the leaders have been Phoenix (+18.8%), Detroit (+7.6%), Minneapolis (+7.4%) and Miami (+6.7%).

Only three cities are still down on a year-over-year basis: Atlanta (-6.1%); New York (-2.3%); and Chicago (-1.6%).

For the first time since January 2007, Las Vegas recorded a positive homes price increase, +0.9% year over year.

The improvement in the resale market is now in its fifth month. It augments other better news on residential real estate including a much better housing starts performance in September, a recently strong permits number, a drop in unsold inventory and lower mortgage default rates.

Then the bolt of lightning struck. Just as the better residential news was beginning to gather attention, the latest natural disaster occurred. Hurricane Sandy blasted the U.S. eastern seaboard.

Many structures are designed with an easy-to-understand criterion in mind, that they be able to withstand the worst storm in 100 years. With tinges of both bitterness and irony, government officials are becoming fond of saying we’re now getting 100-year storms every two years.

Estimates of the physical damage from Hurricane Sandy have started at $20 billion. Experience with previous similar events – Hurricane Andrew in Florida and BP’s oil spill in the Gulf, to name just two  – suggest the figure is likely to be revised much higher in the months ahead.

Governor Chris Christie of New Jersey said every major rail line in his state suffered severe damage. In New York City, the nation’s largest subway system was inundated with water. Commercial, industrial, institutional, residential and recreational properties were wiped out or left in precarious states throughout the storm’s path.

First comes the cleanup. In a literal sense, it’s important to “turn the lights back on.” What follows next is the rebuilding.   

There are two different aspects to the carnage. There is the acute physical damage. And there is the lost economic activity.  

Their impacts on Gross Domestic Product (GDP) are quite different. As vast as the initial havoc may be, it doesn’t detract from GDP. In fact, it leads to more output growth through speeded up efforts to get back to normal. 

Governments and insurance companies foot much of the spending burden. (The latter recoup some of their costs through subsequent higher premiums.)

The repair phase is good for our industry. It’s when construction kicks in and money is spent on infrastructure and other projects. There will be much reconstruction occurring in November and December. More extensive repairs will extend into the first quarter of next year. Some of the work will be delayed contingent on the awarding of contracts.

Plus there is likely to be extensive work in designing new water control systems. As was the case in New Orleans after Hurricane Katrina, the U.S. Army Corp of Engineers will probably move in to figure out a system of levees to prevent a similar event occurring again in the future.

The slowdown in economic activity is another matter. Between 0.2% and 0.4% may be shaved off fourth quarter GDP growth on account of the reduced activity levels.

Many businesses were shut down for a couple of days. Transit came to a stop. Restaurants stopped serving customers. Theatres were shuttered. The usual hustle and bustle of the world’s most energized city took a protracted pause.

Employees weren’t able to get to their jobs. The New York stock exchange was closed for two days, the longest period of downtime since 1888.

We were taught in grade school that tropical storms are assigned names with first letters that move sequentially through the alphabet. Hence, it must be the case that Sandy is the 19th named storm this year (since the letter “s” is in 19th position after the letter “a”).

Not so long ago, there would be 10 to 12 “official” storms each year. This year, the figure is double that number already, with November still to go.

One could easily jump to the conclusion that the higher incidence of violent weather is due to climate change. I’ll leave that up to the scientists to sort out.

In the meantime, it will be interesting to see if the storm has much of an impact on commodity prices. Forestry products are an obvious candidate for a price hike. Plywood is purchased immediately to cover over broken windows. Then as rebuilding proceeds, there’s lumber’s use as a framing material in whole new residential communities to replace what was destroyed.