• 'This will be a big deal for the local economy for sure ... A lot of people have had to evacuate and their jobs,' Tatyana Deryugina, associate professor in finance, tells Anadolu
• 'One should expect rising rents and increased construction costs ... some areas might be impossible to rebuild given current regulatory standards,' says economist Galina Hale

ISTANBUL

Devastating wildfires sweeping through Southern California are expected to be the costliest in US history, both in terms of direct financial losses and long-term economic repercussions, experts warn.

At least 27 people have been confirmed dead as the Los Angeles wildfires continue to cause massive destruction in the US state of California and forecasts for more heavy winds are expected to fuel the blazes in the days to come.

Preliminary damage estimates from the wildfires were estimated in the tens of billions of dollars, with AccuWeather assessing possibly more than $250 billion in damages and economic loss from L.A. wildfires.

The two raging fires in the Eaton and Palisades areas have charred more than 40,000 acres of land, destroying over 12,300 homes, business, churches and schools.

While the national economy is unlikely to experience substantial damage from the fires, the local Los Angeles economy faces significant short-term and long-term challenges, experts say.

"Locally, there will be significant changes to the Los Angeles economy in the short term, the next few months, and longer term," Charles Nyce, a professor of risk management and insurance at Florida State University, told Anadolu.

"It is going to take a long time to recover. It will take years to rebuild that area," he added.

Describing the ongoing fires as the costliest in the country's history, Tatyana Deryugina, an associate professor at the Department of Finance, believes the losses would depends on how long the fires would continue to burn.

"I think it's fair to say that this is the costliest fire, at least in the last 100 years, and depending on how long it burns and how many more areas are affected, the damage and economic losses could rise much further."

Impact on local economy and employment

Experts believe the infernos would have an significant impact on economy of the country's second-largest city.

“This will be a big deal for the local economy for sure, because there were a lot of people living in that area. A lot of people have had to evacuate and their jobs, their lives are disrupted and that's ongoing," says Deryugina.

According to economist Galina Hale, several business operations in the area are temporarily disrupted, with many establishments destroyed by the fire.

"This means that people will lose their jobs and their incomes temporarily or permanently."

A report by news organization CalMatters indicates that thousands of low-income and immigrant workers have lost jobs in the L.A. fires, as they were employed by residents.

Directly impacted communities are going suffer the most from the financial losses, says Hale, a professor of economics at UC Santa Cruz, outlining the industries to be affected the most.

"The tourism industry is also going to suffer partly because there's a lot of smoke in the area, so this is not a particularly good time to visit Los Angeles."

"The film industry will be disrupted because, some of the homes were owned by actors and in general, there's just a lot of activity in the area to put out the fires and a lot of displaced individuals."

Housing crisis and surging rents

Experts also highlighted the housing crisis that can unfold as a result of the disaster, as reports suggest that more than 10,000 dwellings were damaged in the wildfires.

Hale expects surging rentals and high construction costs.

"In the immediate term, due to resulting increased demand for housing and construction, one should expect rising rents and increased construction costs. Some share of the population in the affected areas will choose to relocate and some areas might be impossible to rebuild given current regulatory standards."

Expert Deryugina expects the recovery phase to take time.

"I think rebuilding is going to take some time, partly because the demand for materials will be high, the demand for labor will be high. Not everybody is going to get to rebuild their home as quickly as they can, which is going to create pressure on L.A.'s housing market and real estate."

She expects housing prices to go up as many residents have been left homeless and intend to remain in the area.

Nyce predicts that the at the individual household level, if the losses were uninsured, many households will not be able to recover.

"They will not have the financial resources to rebuild and will suffer significant losses. If insured, they will have resources to rebuild, but it will take time."

Elaborating, he estimates that a significant number of households displaced in the short term.

"Rentals will be hard to come by ... significant increases in rents in the area. Short term, demand for housing in surrounding areas will be higher. Longer term, it really depends on if people decide to relocate."

Citing the examples of New Orleans following Hurricane Katrina in 2005, he said that many people had left the Louisiana city and that rebuilding took a long time.

Hale points out that in some communities, schools have been destroyed by the fire, along with other public buildings.

"It is too soon to tell whether federal and state funds will be deployed for rebuilding such community resources, but if not, or if state and federal funds do not cover the cost of rebuilding, one would have to expect an eventual increase of the property tax in the communities that are already devastated by the fire."

Insurance crisis

The disaster has also put the spotlight on the insurance crisis, with experts warning that insurers may struggle to cover the extensive damages caused by the wildfires.

Insurance companies are also facing criticism for cancelling tens of thousands of policies to ensure their financial sustainability before the fires.

According to Deryugina, "the insurance crisis preceded this current fire as many areas in CA that are prone to fire, flood, or both have already been dropped by most insurance companies."

Spelling out the implications, she said: "I would expect continuing exit of insurance companies from high-risk areas in CA and continuing increase in insurance premia. Moreover, what is considered high-risk is likely to be re-evaluated to include broader and broader set of communities."

In terms of impacts on insurance markets, Deryugina believes companies anticipated that something like this could happen.

"This is one of the reasons why they were pulling out of California, because they weren't allowed to price this in. But certainly, there's going to be more insurers that increase their prices or pull out of markets. So, this is certainly not good news for the insurance industry directly."

At the same time, California had some short-sighted insurance policies that I think this fire will make them realize were short-sighted. But on the other hand, the insurance market does need extensive reform and so this could push policymakers to implement some of this.

According to Nyce, the latest estimates in terms of insured losses are in the $20-$30 billion range.

"Insurers have the resources to cover that type of loss. Insurers stocks did decline but historically, that is a short term response. Longer term, insurance rates will be higher and after the short-term drop in stock values, insurers’ stock values generally rise."

"In this case, if investors believe that these wildfires are just a precursor to more substantial insured losses due to climate change, the stock drops may be more permanent, but I don’t think that will be the case."

Road to recovery

Regarding the recovery and rebuilding, Deryugina says it will depend on how bad the fires will be in the end.

"Unless the fires get much, much worse, the impact on the US economy as a whole will be small," adding that it was possible that the fires get severe enough, facing L.A. with a "long recovery ahead.”

Nyce says that while 10 years is a good estimate for the local economy to recover, nationally, he believes it will not be that long.

For him, the larger concern is that rising property insurance costs in Florida and other hazard-prone areas are leading some people not to purchase insurance. The larger the portion of disaster damage is uninsured, the longer it takes the economy to recover, he said, warning that for some families, full recovery will never come.

"When a loss occurs, the costs of the loss are born by some party. If there is no insurance, that party is the homeowner. They are the least likely to have the financial resources to recover. Going uninsured has significant negative economic consequences when a large portion of the population is uninsured."

Much will depend on the kind and amount of emergency funds being deployed to the area, Hale says. This is especially true for the very local areas, particularly those that combine large shares of low-income communities and large fire impact. "Expect that recovery will take many years," she said.