The Katrina Insurance Problem In New Orleans

If New Orleans can be rebuilt, there is a big problem looming for homeowners there - the small value of their structure and the high value of the land under it.

Of course, most homeowner's insurance will not cover the flood losses being experienced. So, almost all the damage will come under national flood insurance and whatever support FEMA ends up offering. We won't even get into how many people in New Orleans didn't have flood insurance - many houses there are passed down from one generation to the next there, and do not have the strictures of mortgage financers to make sure they were properly insured.

In most situations like this, homeowners benefit from the huge run up in real estate prices that most of the country has experienced over the last couple of decades. This puts the value of the structure above (and sometimes far above) rebuilding costs. Most insurance doesn't cover 100% replacement, but with a lot of asset appreciation you can rebuild something comparable for the amount the insurance will cover.

So, let me use my former house as a typical example. In 2000, we sold a 70 year old, 1500 sq. ft. home, in a good neighborhood, for about $150K. At that time there was a comparable lot available in our neighborhood that sold for $100K. This suggests that 2/3 of the price we got for our home was for the lot, and 1/3 for the structure. This is not the way real estate prices work in most of the country. In some sense, New Orleans is like a very poor San Francisco.

With rebuilding costs (approximately) 100 per sq. ft., the owner of a comparable home will get something like $40K in cash, which will allow them to build a 400 sq. ft. house on their (still valuable) lot to "replace" their 1500 sq ft. home. That's a big problem.

I am not terribly familar with the payments that national flood insurance or FEMA make, so I'd appreciate any constructive criticism that readers could offer on this argument.

Comments

[Berkay]

Please drink an iced coffee for me. I finllay got my vacation dates and I'm heading back home for the last two weeks of December. I have a feeling I'll be crying the whole flight home.... that or smiling so hard that it hurts. I can't say how happy I am for y'all and everyone else in the city.

[Dave Tufte]

I haven't been back in 4 years. The residential areas of the city were not pretty when I was last there.