from the St Louis Fed
Hurricanes can impact household finances in a variety of ways. For instance, they can damage or destroy assets such as home and cars, affect income through job loss, and disrupt families’ repayment of debts.
So, how long does it take flooding victims to overcome the financial hardship caused by hurricanes?
Some research suggests that hurricane victims experience short-term and relatively minor financial stress from flooding, but an analysis of different types of households shows that some of Hurricane Harvey’s victims experienced persistent financial distress, as discussed in an In the Balance article.
In particular, the persistent financial distress was concentrated among homeowners who were in weak financial positions just before the hurricane and who lived in areas of Houston with little expectation of flooding, explained authors Lowell Ricketts (lead analyst for the St. Louis Fed’s Center for Household Financial Stability) and Emily Gallagher (a visiting scholar at the Center).
About Hurricane Harvey
Hurricane Harvey made landfall in August 2017. It stalled over Houston and dropped a record amount of rainwater in the continental U.S. from a single storm, the authors noted. Furthermore, much of the flooding in Houston was unexpected, with only 17% of homes having flood insurance.
The authors also pointed out that the hurricane flooded households across the socioeconomic spectrum. In terms of its effects on people, they noted that it was fairly indiscriminate along racial, income and education lines.
Financial Positions before Harvey
In their analysis, Ricketts and Gallagher focused on how the flooding from Hurricane Harvey affected people with different amounts of resources to absorb the shock to household finances.
They split a sample of Houston residents into those who were financially constrained as of the quarter before the hurricane hit and those who were unconstrained. They also examined their likelihood of having flood insurance.
They used four indicators to determine financial constraint:
- Two variables that measure access to credit – their Equifax Risk Score and their credit card use
- Two variables that measure access to outside resources – median income and share of minority residents within the individual’s census block
Findings on Financial Distress
The authors examined the change in the bankruptcy rate – or the share of a census block’s residents with a bankruptcy event reported on their credit file – for several quarters following Hurricane Harvey.
They found that the bankruptcy rate didn’t increase in the average Houston block, but the flooding did take a greater toll on some areas. Among census blocks with more owner-occupied housing and located outside the flood plain, those that were also financially constrained before the hurricane saw a large relative increase in their bankruptcy rate.
The authors noted that the relative increase for this group peaked at about 1.3 percentage points and that the effect persisted throughout the post-hurricane period. They added that the effect size represented a 30% increase over the pre-hurricane bankruptcy rate in those blocks.
Ricketts and Gallagher concluded: “Stories of financial hardship are masked in the data until the sample can be winnowed by residents’ initial financial constraints, homeownership status and whether they were likely to have flood insurance. Our study shows the importance of these initial conditions and how much they can alter hurricanes’ financial effects on families.”
Additional Resources
- In the Balance: Hidden Financial Devastation Followed Hurricane Harvey
- Dialogue with the Fed: The Economic Impact of Natural Disasters
- On the Economy: Housing Distress in the Time of COVID-19
Source
https://www.stlouisfed.org/on-the-economy/2020/september/financial-hardship-following-hurricane-harvey
Disclaimer
Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.
