Chris Lafakis, Director at Moody's Analytics, predicts the economic impact that the Los Angeles fires will have on the state of California.
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00:00Presumably hundreds, if not thousands, will not rebuild or will not be able to, will not
00:05be able to afford to rebuild there.
00:09How potentially might this remake real estate and the map, as I suggested earlier, we're
00:13already seeing thousands leave Florida because they simply cannot get home insurance.
00:20Absolutely.
00:22And we saw this happen after Hurricane Katrina, where population declined in the aftermath
00:30of that storm.
00:32In Florida, insurance is becoming more and more expensive.
00:36And as a percentage of kind of the cost of home ownership in Florida, it's one of the
00:40highest five or 10 states in the nation.
00:43And that has led to some out migration.
00:47And I would expect the same thing to happen in California, where you're going to get some
00:52insurance payouts.
00:54Perhaps people take the money and run.
00:57But if they decide to stay, the more expensive nature of the insurance is going to act as
01:05a tax on all the homeowners that live within the state.
01:11And that's going to reduce housing values.
01:14And it's there's also rebuilding challenges because it's hard to to get permits sometimes
01:21to build in certain parts of the state.
01:24There could be labor constraints if we're cracking down on types of, you know, illegal
01:32immigrant workers that don't have documentation that might operate more in the construction
01:38industry.
01:39There are challenges in terms of the supply of labor required to rebuild, the cost of
01:45rebuilding, whether or not you can get permitting to rebuild.
01:49These types of all of these issues kind of combine to reduce the amount of migration
01:56into California and exacerbate migration outflows from California.
02:02So and at the end of the day, economic growth is really the sum of two things, productivity
02:09growth and population growth.
02:11And if California is losing population to other states, then that impacts the California
02:18economy.
02:19And that's a long term issue.
02:20That's not just a short term issue where six months after the wildfires, we were in this
02:26rebuilding phase.
02:27This could impact California's economy for the next five or 10 years or more.
02:33That's what I wanted to ask you about.
02:34We're talking about the U.S.'s largest economy by state by a wide margin.
02:38Not just that, but if California were an economy, it'd be the fifth largest in the world as
02:44a country.
02:45How could this impact the California economy moving forward?
02:50Well, I think that you will see the housing market have less demand for housing, so potentially
02:58lower house prices than would otherwise be the case.
03:02You know, with one wildfire event, you know, I would caution against making it too grand
03:09of a prediction.
03:10But I think that housing values will, in fact, be lower than they otherwise would have been,
03:14especially in the Southern California area, especially in Los Angeles, where there have
03:19been issues with wildfires in recent years.
03:22It ensures and that's why they've been pulling out, because the frequency at which these
03:27natural disasters are occurring has been greater than it has been historically.
03:32And so they're not able to accurately estimate payouts and profitably underwrite policies.
03:38So I think that you'll have lower housing values.
03:41I think you will have more expensive insurance.
03:44That's going to reduce disposable income and it's going to result in outmigration.
03:52So I think that the combination of those three factors will occur.
03:56So lower house prices, more expensive insurance and fewer people staying within California.
04:01And likely some businesses that won't be able to afford rebuilding either.
04:06Much debate today, Chris, about the impact of climate change in either causing or worsening
04:12these California wildfires.
04:14Objectively speaking, where do you and where do Moody's stand on that question?
04:20So we rate different localities based on their exposure to wildfire, to flood, to tropical
04:30cyclone, these types of perils.
04:34And we have scores that are from zero to 100.
04:38And certainly in California, a lot of the metropolitan areas have higher wildfire scores.
04:44So yeah, these are areas that are more susceptible to natural disasters occurring of this exact nature.
04:56It gets worse as temperature increases.
04:59And so if we are in a world where temperature is three degrees Celsius above pre-industrial
05:05levels or even four degrees Celsius above pre-industrial levels, you're going to have
05:09more natural disasters and you're going to have more wildfires in that type of world
05:13than if temperatures are where they currently are, which is closer to one and a half degrees
05:17Celsius above pre-industrial levels.
05:21So I think that our research kind of reflects that.
05:23I think that's a fairly straightforward scientific conclusion.
05:28Boy, it's nice to hear some facts, some science.
05:32This is not about political opinions.
05:35There's certain facts that make this science.
05:38Chris, really appreciate it.
05:40I'm just curious whether to use an analyst or use a human being.
05:43Any thoughts about the best way to support those who have lost homes, who have lost businesses?
05:48Well, I think that as citizens, charitable contributions are our best avenue.
05:55There's institutions out there like the Red Cross that are dedicated to providing relief
06:00to families.
06:03I think that there's certainly things that the state government can do to conduct an
06:09investigation to, and maybe this is done at the federal level as well, if there's
06:13anything that can be put in place, preventative measures to boost our adaptive capacity to
06:20help us be more resilient to types of events like this in the future.
06:24I think that's very important as well.
06:27I'm sure that federal lawmakers will also look at providing aid, federal aid, like we
06:35have for most of the large natural disasters that have occurred since Hurricane Katrina.
06:42So that would be probably another step that we could take.
06:48So really, really a combination of things that we can do, both at the individual level
06:52and as governments.
06:56And hopefully we will all continue to do so.
06:59Moody's analytics director, Chris Lefakis, really appreciate this.
07:02We'll check back in a couple of weeks once we have a clearer picture of the true scale
07:06here.
07:07Really appreciate it.
07:08My pleasure.
07:09Thanks for having me.