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The enormous scale of the wildfire devastation in Los Angeles County is still coming into focus, but it is already clear that the task of rebuilding to come will be herculean.
As the disaster is ongoing, the current focus properly remains on containing the blazes and protecting lives and property from additional harm.
However, state and local officials have begun to set the stage for rebuilding, by announcing rollbacks on building regulations in hopes of speeding the recovery.
At least 12,300 structures have been destroyed in the fires, according to Cal Fire, but it’s unclear how many of those buildings were homes.
The areas with the greatest devastation include the Pacific Palisades, which was decimated in the Palisades Fire, and Altadena, where the Eaton fire wrought destruction.
Loss estimates will likely continue to rise, with damage assessments still underway. But in their latest estimate on Tuesday, analysts with investment bank Keefe Bruyette & Woods predicted insured property losses of up to $40 billion, roughly double their estimate from a day earlier.
That would make the recent wildfires by far the largest wildfire insurance industry loss event in history, exceeding the $11.5 billion in insured losses in the 2018 Camp Fire.
What will it cost to rebuild a destroyed home?
For individual homeowners, rebuilding costs will vary widely depending on the size and nature of the new home.
In the Pacific Palisades, homes were listed at a median price of $4.7 million last month, but much of that value was in the land itself, before any improvements. December’s median list price in Altadena was about $1.3 million.
Land values in Los Angeles account for an extremely high share of home value, among the highest in the nation.
Across Pacific Palisades and Altadena, land values make up about 78% of total property value, according to an analysis from the American Enterprise Institute.
Using market values as a guide, a rudimentary analysis from the Realtor.com® economic research team suggests that the typical cost to rebuild a home could reach $947,000 in Pacific Palisades and $262,000 in Altadena.
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That rough estimate assumes improvement value share of 20% in both areas, after deducting a 2% profit margin for builders.
Still, there remain many unknowns, including whether construction costs will skyrocket due to overwhelming demand as the rebuilding begins.
As well, those early estimates do not include the cost of debris clearing and site remediation, or the repairs to roads and utility services that will be needed to make the affected areas habitable once again.
It’s also unclear how many residents will choose to stay and rebuild following the trauma of losing everything.
Seeking a fresh start, or fearing a repeat of the disaster, some could choose to sell as is and move elsewhere. A flood of such listings could bring prices down sharply, if they aren’t met with an equal pool of ready buyers.
“The area may see long-term price depreciations and insurance premium increases as the climate risks are taken into account. But in the short term, we expect housing to become more expensive due to supply and demand fundamentals,” says Realtor.com senior economist Joel Berner.
“Look for spikes in rent, especially in areas near but not directly in the path of the fires, such as Santa Monica,” he adds. “Los Angeles already has a low vacancy rate, so more people chasing after fewer rentals will drive rents up.”
What will insurance pay for?
Homeowners with insurance should be able to expect some relief, as damage from smoke and fire is covered under standard homeowners and renters insurance in California, according to the Insurance Information Institute.
“Insurance coverage varies with differing policy limits, and we’ve seen recently that insurance companies have been canceling policies, so it’s important to know the specifics of your policy,” says Berner.
A home burning down due to a wildfire will generally be covered up to the insured amount minus depreciation under dwelling coverage, belongings will be covered under personal property coverage, and the cost of relocating temporarily may be covered by loss of use coverage, he adds.
Some major insurance carriers, including State Farm, recently canceled their policies in the affected areas, citing unsustainable climate risks.
But California’s state-operated FAIR plan serves as an insurer of last resort, offering limited coverage for high-risk properties.
The FAIR plan covers up to $3 million in damages for residential policyholders and reimburses the cost of renting a property that is similar to the damaged residence.
For larger ultraluxe properties destroyed in the fires, that may not cover the entire cost to rebuild.
For example, real estate investor Robert Rivani told the Wall Street Journal he’d spent $27 million to buy and renovate a home in Malibu’s upscale Carbon Beach, but expected to receive only $3 million in insurance claims from the FAIR plan.
No other insurer would cover the property for its full replacement value, Rivani said.
Will regulatory rollbacks help the rebuilding process?
On Sunday, California Gov. Gavin Newsom waived environmental permitting and review requirements in areas affected by the fires to expedite the rebuilding process.
As well, Los Angeles Mayor Karen Bass issued an executive order expediting the local building permitting process in the affected areas for up to a decade out.
“This unprecedented natural disaster warrants an unprecedented response that will expedite the rebuilding of homes, businesses and communities,” Bass said in a statement. “This order is the first step in clearing away red tape and bureaucracy to organize around urgency, common sense and compassion.”
The mayor’s steps include establishing special permitting centers in the impacted burn areas, mandating expediting permitting review of 30 days or less, and waiving demolition permit requirements for any structures substantially damaged by fires.
“It will be important for leaders in California to ensure that regulatory red tape does not get in the way of the massive rebuilding process that will take place once the fires have passed,” says Berner. “Rolling back building regulations will allow for speedier and more cost-effective rebuilding, getting more people back in their homes sooner at fairer prices.”
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