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LA fires $30 billion property losses way too high
A recent article in the LA Times was titled "Property losses from fires may top $30 billion." Within the article, it disclosed three different estimates all around $30 billion or slightly more. The estimators included:
- The Los Angeles Times
- UCLA Anderson School of Management
- CoStar Group
Why the $30 billion estimates are too high
All estimators confused a house market value vs a house replacement cost. Let's say a homeowner has a house with a market value of $2 million and a replacement cost of $1 million. The difference between the two is the market value of the land or $1 million. The land does not lose its value. And, it certainly does not need to be repurchased. Yet, the estimators did not figure this out. And, instead they estimated the loss at $2 million instead of $1 million.
Number of housing units destroyed by the LA fires
The LA Times article disclosed the number of housing units of each type affected by the fire. The average size in square feet is just my starting estimates.
Next, let's build a simple model using some of the above information as inputs into the model.
A model to figure out the LA fires replacement costs
There were 12,773 housing units destroyed. I estimated their average size at 2,217 square feet. Going to the Blue Hammer website, I got that the replacement cost of a house in Marin County is about $320. That is probably a good proxy for the affected LA areas. Now, with just these three inputs, we figure the replacement costs of those units come in at $9.1 billion.
Next, let's sensitize both the average size of the units and the replacement costs per square foot.
I considered costs per square foot that are 25%, 50%, 75%, and 100% greater than the baseline of $320. So, they range up to $640.
I also sensitized the average size per unit from 2,200 to 2,900.
When you look at the 42 different scenarios, it provides an interesting range of possibilities. I highlighted three of them in yellow.
- The one at the top left-hand side represents our baseline starting scenario with a total replacement costs of 9 billion.
- The one at the bottom right-hand side represents the maximum estimate at $23.7 billion.
- The one in the middle is the median estimate at $15.9 billion.
In view of the above, a total replacement cost ranging from $9 billion to $16 billion seems pretty realistic. The latter would already entail an average unit size of 2,600 which seems very large given that many units are condos and apartments. It also entails a cost per square foot that is already 50% greater than the baseline estimate.
THE END
Gaetan Lion is an independent researcher with expertise in economics, econometrics, investments, risk management, statistics, and quantitative analysis. His areas of interest include demographics, economics, investments, Climate Change, health care, sports, and politics.