What happens to residential real estate in earthquake disaster areas?
Like Kobe (1995) or recent quakes in New Zealand or Japan (again)? Is
it worse than what has happened with the US housing bubble? Foreclosures
rampant in damaged areas, that sort of thing?
I ask because I'm struggling mentally with the question of paying off
all or most of our mortgage. It's the question of staying liquid or
sinking more cash into a risky, illiquid asset.
A few things are bugging me: one, our house is in the SF Bay Area and
might be damaged, a little or a lot, in the next big quake (could happen
this afternoon, could happen in 30 years). If the house is a total loss
and the land loses value, recent events show that simply walking away
from an underwater mortgage might be a financially wise thing to do.
Earthquake insurance has never seemed like a good deal (too high a
deductible), so we don't have any.
Two, I keep on thinking inflation is going to kick in big time, and that
means paying back the loan with cheaper dollars and getting higher
return on cash savings.
Three, we are in our mid-late fifties, working full & part-time, kids in
their twenties and still boomeranging, and one of us wants to downsize
out of this house in the next few years (sell or turn it into a rental),
while the other does not currently share this desire.
The mortgage is a $200K loan balance with 14 years left at 4.875%, so
monthly interest is a little less than $800. This is not all tax
deductible since our itemized deduction is not much more than standard
these days. We have about 55% equity in the house at current market
(which may still go down another 5-10%), and an unused $40K equity
credit line which is currently at something like 3.5%.
There is some inheritance money and other cash savings which could be
used to pay off the mortgage in full, or to pay off $160K and pay off
the remainder with the equity line (which requires a balloon payment in
a few years, unless the bank agrees to extend it). We also have about
$400K pre-tax retirement money all in the stock market, and enough extra
cash and Roth money to allow for a generous emergency fund. Of course,
this same money could be thrown into the stock market instead, right now
it's earning very little interest.
My mental struggle makes me think I'm maybe being irrational about the
benefit of staying liquid as a hedge against earthquakes, inflation, and
the other factors above. Any way to boil this down to a more objective
calculation? Thank you, and sorry for the long story.
In article ,
The rest snipped
Using the Northridge earthquake (1994) which was centered in suburban
Los Angeles as an example.
If a residence was red-tagged (uninhabitable) and the owner had
earthquake insurance the house was repaired if not it was abandoned and
usually demolished. If too many homes in a neighborhood were abandoned
the non red tagged homes suffered loss in property values. Many condo's
became underwater because of needed repairs. - New Orleans after Katrina
is another similar example. On the other hand if repairs are reasonable
people just carry on
Until the Northridge earthquake, earthquake insurance was readily
available in SoCAl with reasonable deductibles. Today earthquake
insurance has a 15% of the face value deductible and premiums are
several times what home owners insurance premiums are.
I live about 30 miles west of the San Andreas fault. From the time I
bought my home in 1971 until the mid 1980's I did not have earthquake
insurance (I always felt that I was renting my house from the mortgage
lender). Then when I had equity I bought insurance until 1994 when my
insurer nearly went under and stopped issuing home owners insurance.
After I sold that house and remarried and moved into my current wife's
craftsman style home (with a substantial mortgage) I had the house
bolted to the foundation.
A conversation with a local fire chief revealed that most damage in the
Northridge earthquake was well under the 15% current deductible.
Not really addressing your question, but: since you have significant
funds available, and you will always need some place to live, perhaps
you could use some cash to do a seismic retrofit to the house to make
it more earthquake resistant? If there were to be a catastrophic 1906
type earthquake, your mortgage will not be your biggest problem.
There are several companies in the bay area that do this type of work
- for example
Real estate can drop, but it usually won't drop much below replacement
costs ($100 / sq ft).
You're better off being more liquid.
Wages and house values may go up with inflation, but investments may
My spouse and I sold our home and downsized to move to a milder
climate (San Francisco would have been better in terms of climate). We
tried to pick a low tax state with reasonable home prices. We ended up
with a larger home because competition for smaller homes made them
less reasonable in price.
Downsizing is hard because open floor plans in modern houses don't
allow personal spaces such as offices and hobby rooms. If you're not
moving far, don't bother to downsize.
If you are moving far, renting your current home could have problems.
Don't let anyone in government hear you say that! My goodness, Skip -
that's financial heresy! We'll be sending a lender and insurance
agent, from the Financial Inquisition to speak to you about this -
they'll bring a bottle of bubble-maker with them as a free trial