In the wake of Hurricane Harvey’s wrath that killed 40-plus Texans, displaced 33,000 others and caused damage to roughly 20,000 homes, all of which are numbers expected to rise in the days and weeks ahead, Houston, indeed, does have a huge recovery problem in its midst.
What kind of insurance coverage and mortgage relief might you expect if you’re a real estate investor or owner of your own home in the Houston area? What disaster relief might be in the offing—and how soon—from national and state lawmakers? Will the cost of construction materials and commodities climb as the city rebuilds?
Real estate investments expert Jason Hartman addressed these concerns and others during a recent episode of his popular podcast show, “Creating Wealth.” Helping him co-host the show was his Empowered Investor senior investment counselor, Sara Liskey, who owns an investment rental property in the Houston area herself and has friends who live there.
They spoke four days after Hurricane Harvey struck Houston—while it was still raining heavily and floodwaters were continuing to rise at record-breaking levels.
Acknowledging that you as an investor or homeowner must keep your eyes peeled on the news in the weeks ahead to know what will happen for certain, the Empowered Investor duo spoke from their experience with such storms as Hurricane Katrina and in dealing with insurance companies in general.
Hartman: You Shouldn’t Shun ‘Disaster Capitalism,’ It’ll Get Some Recovery Going
Hartman says that whenever there’s a disaster, there are opportunists who jump in and think, “How can I make money off that?” Then the stock market and the whole economy react to the disaster’s aftermath, often with higher costs in construction materials and other commodities involved in building homes or making repairs, which will be a boom to those sectors of the economy.
Naomi Klein wrote about such “disaster capitalists” in her 2007 book, “The Shock Doctrine: The Rise of Disaster Capitalism”—a book that Hartman suggests that you, as an investor, might read, as he did some years ago. Klein, a columnist for The Nation, writes in the book from her reporting experiences in Iraq, the 2004 tsunami that struck Sri Lanka and 2005’s Hurricane Katrina.
In “Shock Doctrine,” as this review from Goodreads notes: “By capitalizing on crises, created by nature or war, Klein argues that the disaster capitalism complex now exists as a booming new economy, and is the violent culmination of a radical economic project that has been incubating for fifty years.”
Hartman says the advance of “disaster capitalists” on Houston in Hurricane Harvey’s wake “is not a bad thing” necessarily. His Empowered Investor network offers real estate investment properties in the Houston area, and he had already donated money to a couple of Houston-area recovery charities the day his podcast with colleague Sara aired last week.
“There are crooks and bad people who’ll take advantage of situations, but for the ones who don’t, they are providing needed services for safety and recovery and all of the things people need,” Hartman says.
“Without capitalism, specifically disaster capitalism, who would be there to provide it?” he asks. “The lousy government? Look at the tragic job they’ve done. Look at the terrible job they did during Katrina in New Orleans and the other areas that were affected. It was pathetic.”
Hartman didn’t want to sound like an armchair quarterback since it was still too early last week to see how recovery efforts might develop in Hurricane Harvey’s wake.
But, “It seems the government’s response here is pretty pathetic again. Not only is the response pathetic, but the fact they even allowed this to happen in the first place. And what I mean is going back to the urban planning, and the flood control, and all of the systems involved in water management in Houston. Just not acceptable.”
“First off, I just want to express my deep concern, and, Sara, I know you feel the same way. Just a terrible, terrible situation in Houston, and hopefully, the recovery will be swift.”
“It’s just really heartbreaking,” Sara says.
She adds: “I’ve been totally glued to the TV and my Facebook feed. You know, I have a friend I went to high school with who has been posting live video of the flooding. Ironically, she lives where I own a property in Katy, Texas, which is pretty far inland.” Katy, about a half-hour west of Houston, did suffer major flooding, but Sara and her friend apparently hadn’t learned the extent of damage to their properties yet when she spoke last week.
“I’ve had that property for 10 years,” Sara says, “and I’ve been through a hurricane before with very little damage. But I really think that this storm was even bigger than anyone really expected. I mean, they said there was a warning and they said it was going to be the biggest storm ever, but it happened so quickly. It’s still storming out there.”
“It’s really too early to tell the magnitude of this thing and the devastation, but I completely agree with you that there’s going to be a huge need for help in housing and several different areas, and so we’re going to need people, these capitalists, to come in and make that happen.”
What Might You See Happen in the Form of Hurricane Harvey Relief?
Speaking from his Empowered Investor and real-estate investing experience from when Katrina in 2005, Hartman predicted what might happen for Hurricane Harvey victims in the days and weeks ahead.
First of all, expect a lot of insurance bad-faith litigation, or “people suing their insurance companies, saying they didn’t provide enough coverage and many times they’re right,” Hartman says. “I mean, insurance companies, they try to weasel a lot of times and not pay claims, and not pay as much as they should pay, So, there will be a lot of litigation there, of course.”
Secondly, there probably will be a call for and most likely be an actual moratorium on mortgage payments, Hartman thinks.
“We saw this during Katrina, where many of the lenders did a six-month moratorium and said people don’t have to pay their mortgage for six months. And guess who benefited most from that, and who got hurt the most from that? Well, the people that had equity in their properties didn’t get any benefit from that, because if you don’t have a mortgage, how do you get a benefit from a moratorium?”
However, those who still had debt on their mortgages during the Katrina disaster, and perhaps those in Houston after Hurricane Harvey, “they got the benefits.”
“Again, as I always say, the best insurance is a high loan balance,” Hartman says.
“If people have a lot of equity in their property, and if people own their property free and clear, meaning they have 100 percent equity, well, they’ve got to go hire the lawyer themselves and fight with the insurance companies themselves.”
“But in some cases, when they have a high loan balance, the lender will go to bat for them, and sometimes the lender doesn’t even formerly go to bat for them, but the insurance company just knows there is a lender and a high loan balance. A lot of times, the insurance company is more likely to be on better behavior and pay claims more quickly and more completely, if you will, when there is a lender involved.”
A third event that you might see happen soon?
The Federal Emergency Management Agency (FEMA) or some other federal or state agency could offer disaster relief assistance soon, depending on what politicking might occur.
President Donald Trump and the White House were pushing for nearly $8 billion in Hurricane Harvey aid as of this past weekend, but Treasury Secretary Steven Mnuchin said on Sunday that the relief might be delayed if Congress does not quickly increase the government’s debt limits.
“Without raising the debt limit, I am not comfortable that we will get money to Texas this month to rebuild,” Mnuchin said.
Should relief come soon, Hartman says, “We’ll see low-interest loans, we’ll see various government aid and so forth offered as well. The government usually creates the problem in the first place and then acts like the hero when they come in and solve the problem. Many times, they created the problem or had some hand in creating it in the first place, but that’s just the way our system works.”
One more possible event for you as a Houston area property investor is legislative action that might result in something like the creation of the GO zones that were offered to victims of Hurricane Katrina. That law encouraged real estate investments and repairs in Katrina-stricken areas to keep them up and running and to spare a mass exodus of the populace from them.
“What we might see in the future, but I wouldn’t bank on this because nobody knows, is we might see some sort of tax incentive for rebuilding,” Hartman says in the “Creating Wealth” podcast. “We saw this in something years ago … and that was the GO zone, you remember the GO zone, Sara?”
“I do: In fact, when I bought my property in (Katy, Texas), it was supposed to have been a GO zone property,” Sara replies.
But, “There was some debate about certain zip codes and things like that, so I don’t think I ever took that deduction. But a lot of our (Empowered Investor) clients did. I have to imagine that they’re going to have to do something like that to rebuild this huge community (of Houston).”
How Flood and Other Disaster Insurance Might Work for You
It has been estimated that only 15, perhaps 20, percent of those afflicted by Hurricane Harvey will be covered by flood insurance—but much of that depends on what sort of damage you sustained as a homeowner. Wind damage to a roof, for example, might get covered. Many homeowners don’t carry flood insurance, though, unless their lender requests them to do so, and that’s usually only when the property lies within an officially mapped flood zone.
Hartman urges that if you are a real estate investor, try your best to wait patiently and see what happens in the weeks ahead. Your lender should be notifying you if your property was affected and if relief or insurance coverage is possible.
“Really bad things can happen in your life and you think, ‘Oh, my God, this is the end of the world,’” Hartman says. “But it’s like the author Richard Bach said, ‘What the caterpillar calls the end of the world, the master calls a butterfly.’ It depends on how you look at it, and if you just wait long enough, a lot of times, things can turn out really, really positively.”
Hartman gives an example of what eventually happened to a Katrina victim who also was a Empowered Investor client when that storm struck more than a decade ago. The client’s property was destroyed by the storm surge that Katrina stirred.
“This is a way of actually renewing and rebuilding,” Hartman says of his client’s experience. “So, a condo developer came along and wanted to do an assemblage and buy up some lots in this area, and it turns out the property, as a vacant lot, post-disaster, was worth a lot more money than the home itself.”
“So, it’s interesting how that works. Sometimes the insurance claim … I talked about insurance bad faith and sometimes insurance companies don’t like to pay claims … but sometimes the insurance claim will actually overpay and you can get the construction done for less than you receive from the insurance company. So, a lot of times these things work out a lot better than we think at the time.”
A Hub of Activity You Can Expect Soon … and Here’s Wishing the Best for Houston
Whenever a natural disaster like Hurricane Harvey occurs, you’ll see the costs of labor rise, as will the cost of gasoline and oil—after all, a major part of the refining capacity of the United States is in the Gulf Coast area. Also rising will be the costs of commodities, or most construction materials, such as sheetrock, lumber, copper wire, glass and steel.
“I mean, just every construction material will become more expensive,” Hartman says.
“And labor will become more expensive, and there will be a lot of construction workers moving into the impacted areas. People will move from the surrounding areas into Houston and the other affected areas in Louisiana to do construction and provide services and provide labor, and insurance adjusters will move there.”
Though he hesitates to describe it exactly this way, Hartman repeats that Hurricane Harvey is an economic boom of sorts.
“This isn’t the kind of economic boom you want because it’s more like war,” he says.
“War destroys things, but they say war also destroys the economy. Well, the biggest public works project of all time was World War II, and many say that’s what got us out of the Great Depression, was World War II. (Harvey) is not the kind of economic boom you want, necessarily, but it is a boom, no question about it either way.”
Sara remembers the real estate crash of 2008 and the financial crisis of 2009 and how they brought much doom and gloom to Empowered Investor investors at the time.
“It seems like the world was falling apart,” she says. “It was bad for a couple of years, but you’re right … in 2010, it just picked right up and we haven’t looked back since. The buyers in 2010, 2011, they made out, like, just beautifully, so maybe that’s a little inspiration for people in Houston having challenges.
“It’s probably going to seem heavy for a while, but it will work out.”
