The Consequences of the LA Wild Fires on the Real Estate Market

The recent wildfires in Los Angeles have been a devastating tragedy, consuming more land and destroying more structures than the bombings of Hiroshima and Nagasaki combined (though, luckily, the fires have caused far, far fewer deaths). This horrendous ordeal will profoundly impact the city’s real estate and construction markets, resulting in significant challenges and transformative changes.

Impact on the Rental Market

The destruction of more than 10,000 homes has intensified the existing housing shortage in Los Angeles. This scarcity has driven up rental prices, with some areas experiencing increases of over 50% in some places. For instance, a condominium in Beverly Grove saw its rent surge from $5,000 to $8,000 per month, while a five-bedroom house in Santa Monica is now renting for $15,000 more than it did the previous year.

The sudden displacement of residents has led to a surge in demand for both short-term and long-term rentals. Realtors report a significant uptick in inquiries, with thousands of families seeking temporary housing solutions. This heightened demand has further strained the already competitive rental market, making it increasingly challenging for residents to find affordable accommodations. Realtors with firms like Compass have been looking for “pocket listings” —convincing people to open up guest houses, spare bedrooms, etc. that would not normally be on the rental market. While many have complained about the so-called price-gouging, the higher prices encourage those that can, for example, move further out or stay with family and friends to do so while convincing people who would otherwise never open their home to renters to do so.

Effects on the Housing Construction and Materials Cost

The widespread destruction caused by the wildfires has necessitated extensive rebuilding efforts. Construction companies are now facing the daunting task of reconstructing thousands of homes and infrastructure. This surge in demand for construction services is expected to lead to increased costs for labor and materials, potentially causing delays in rebuilding efforts. This heightened demand is expected to strain supply chains, causing shortages and driving up prices not only in California but also in other regions. Producers, especially those supplying essential materials like plywood and wood framing, will increase prices in response to the elevated demand.

Moreover, the heightened awareness of wildfire risks is influencing construction practices. Builders are now prioritizing fire-resistant materials and designs to mitigate future risks. This shift not only impacts construction costs but also requires updated building codes and regulations to ensure resilience against future wildfires.

The recent wildfires in Los Angeles will have a significant impact on the availability and cost of building materials. The destruction of over 12,300 structures has created an urgent demand for reconstruction, leading to a surge in the need for materials such as lumber, concrete, and steel.

Additionally, the rebuilding efforts are likely to exacerbate existing labor shortages in the construction sector. With approximately 253,000 trade workers in the Los Angeles area as of November 2024, the massive reconstruction projects will require a substantial workforce. Given the low unemployment rates among construction workers, the demand for skilled labor is expected to tighten, leading to increased wages and further elevating overall construction costs.

These factors combined suggest that the aftermath of the Los Angeles wildfires will have a cascading effect on the construction industry, influencing both material costs and labor availability across the nation—and particularly in the Western US. Stakeholders should anticipate these challenges and plan accordingly to mitigate the impact on ongoing and future construction projects.

Insurance Challenges

The wildfires have also exposed vulnerabilities in the insurance market. Many homeowners, like Miriam Cotero from Altadena, found themselves underinsured when their homes were destroyed. Cotero’s newly renovated home was valued at $1.2 million, but her insurance coverage was only $200,000, leaving her with an $800,000 mortgage and no place to live.

Additionally, insurance companies have been reevaluating their policies in high-risk areas. Approximately 1,600 policies in Pacific Palisades were dropped by State Farm in July, reflecting a broader trend of insurers withdrawing from markets susceptible to wildfires. Proposition 103, a 1988 law passed through California’s direct Democracy based proposition system, may need to be replaced. In California, the government must approve hikes in fire insurance rates—and only actual claims data, as opposed to projections, can be used to justify the hikes. This is part of the reason that insurance companies have simply pulled out of the market.

Long-Term Economic Implications

The cumulative effect of these factors poses significant long-term economic challenges for Los Angeles. The increase in rental prices exacerbates the affordability crisis, potentially leading to a displacement of lower-income residents. The strain on the construction industry may slow down the rebuilding process, prolonging the recovery period for affected communities.

Furthermore, the instability in the insurance market could deter investment in real estate, as both homeowners and investors grapple with the uncertainties of obtaining adequate coverage. This could lead to a stagnation in property development and a potential decline in property values in high-risk areas.

Conclusion

The Los Angeles wildfires have triggered a cascade of challenges across the real estate and construction sectors. Addressing these issues requires a multifaceted approach, including support for the construction industry to facilitate efficient rebuilding, and reforms in the insurance sector to ensure homeowners are adequately protected. The resilience of Los Angeles will depend on the collective efforts of government agencies, the private sector, and the community to navigate these complex challenges and rebuild a more robust and fire-resilient city. 

Read more: A look at 2025 market forecasts

Franklin Carroll

Franklin Carroll is Kukun's VP of Modelling and Analytics; After finishing his studies at the University of Chicago, he worked at Fannie Mae where he helped build Collateral Underwriter, roll out the Value Verify initiative, and specialized in collateral related and credit related policy.

Published January 24, 2025