4 Ways Natural Disasters Destroy Your Local Economy

Globally, the number of extreme weather events is increasing, and many of them have an economic impact on the areas that are hit.

The U.S. already sees more than 100 natural disasters every year. These include events like blizzards, floods, hurricanes, tornadoes, mudslides and wildfires.

Further, America’s coasts are becoming busier economic hubs, and since many natural disasters like hurricanes hit along the coastline, more people are at risk of being affected.

And the damage inflicted by a natural disaster is more than physical.

Here are some of the economic impacts you may see from increased extreme weather activity.

Cities must spend to prepare

Natural disasters are frequently unpredictable, but to the extent that they’re likely to happen in a given area, that locality must prepare for potential damage. Local governments should consider developing emergency operations plans and put systems in place to respond appropriately when a disaster occurs. That includes alerting and warning citizens, ordering evacuations and being prepared to send in firefighters, police or emergency workers. A city may have to provide emergency power, shelter, communications or medical care.

At the state level, at least 19 states in the U.S. have adopted pre-disaster mitigation policies that address building codes and research into the risk of natural disasters. Most states don’t comprehensively track disaster spending, and state spending on disaster prep differs from state to state. For instance, North Dakota spent $226 million on local flood control and property acquisition projects, and Oregon invested almost $36 million in earthquake retrofits for public structures, according to Pew Research.

As expensive as hazard mitigation is, however, research suggests that every dollar spent on it can save the U.S. $6 in future disaster costs.

On a micro level, homeowners must also prep for the likelihood that their house will be hit by a disastrous event, and many people underestimate the damage such an event would cause. More than half of Americans guessed that the average home would need less than $10,000 in damage repairs after a hurricane or flood, but 2017 average claim amounts are more like $10,200 for wind and hail damage and $92,000 for flooding.

More people move away

Disasters, such as volcanoes, hurricanes and forest fires can cause many to leave an area, increasing what experts call “out-migration” from the county by 1.5 percentage points. Hurricane Katrina resulted in an out-migration increase of 12 percentage points.

This may be because the number of natural disasters has increased, so once an event happens in a place, people assume more events are coming. It may also be that aid payments after a natural disaster has increased, making it easier for people to relocate.

Generally, the people who cannot leave a place that’s been hit by a natural disaster are poorer than those with the ability to move elsewhere, leading to an increase in poverty rates there.

Housing prices decline

A severe disaster in an area can lower housing prices by 5.2% and rents by 2.5%, according to the National Bureau of Economic Research. Because an area is perceived as a risky place to live — or perhaps a place with fewer resources during disaster recovery — demand for housing decreases, which results in lower prices and attracts poorer housing residents.

While milder disasters have less impact, larger events can cause even more economic harm, depending on the event. After a 2010 Colorado forest fire that burned more than 6,000 acres, prices in nearby areas — considered vulnerable but not directly impacted by the fire — saw a 21.7% decline in sale prices.

Other costs associated with housing can also be affected. For instance, one analysis found that big natural events can lead to statewide bumps in insurance premiums as high as 8% on average. Homes in states like Florida and California are particularly vulnerable to this, but so are homes in Louisiana, New Jersey and Delaware, which all have a large share of at-risk homes.

Businesses may shutter

A natural disaster can spell doom for a small business. In fact, nearly 40% of small businesses never get back on their feet after a disaster, according to the Federal Emergency Management Agency (FEMA). It doesn’t take much water to cause a lot of damage: The average commercial flood claim came in at just over $85,000, which is a big hit to a small company.

In addition to shutting down small businesses, natural disasters can seriously disrupt larger businesses, which might lose equipment, buildings, necessary supplies and communication infrastructure. In many cases, businesses affected by catastrophic events suffer from closings and loss of revenue. This is especially true for the tourism and hospitality industries, which may thrive in a coastal town and then suffer when that town is evacuated and airports are closed.

Bottom line

Natural disasters are increasing in number and intensity worldwide. For local economies, that could mean increased spending on disaster preparedness, as well as impact on housing prices, population and businesses if events impact an area. That said, disaster mitigation spending can save exponentially on potential disaster costs, so localities would be wise to investigate ways to invest in and protect their future.

Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.