The Catastrophic Wildfires Across Los Angeles Will Exacerbate the City’s Housing Shortage

With tens of thousands of acres burning in at least five separate blazes across Los Angeles, the scale of the damage is impossible to comprehend.

The two largest fires, the Palisades Fire ripping through the affluent Pacific Palisades neighborhood, and the Eaton Fire near residential hubs Pasadena and Altadena, were still spreading uncontrollably Thursday afternoon, fueled by high-speed Santa Ana winds and extra dry conditions for this time of year, according to CalFire, the state agency that oversees fire management.

Together, they had burned through nearly 36,000 acres as of Friday afternoon, claiming more than 10,000 structures and at least five lives, according to CalFire.

The devastating fires have leveled whole blocks of homes, from multimillion dollar mansions in one the country’s most expensive neighborhoods to humble midcentury bungalows and multifamily apartment blocks, as well as businesses, schools and historic buildings.

“This is an entire community, several communities, just entirely wiped out,” said Tracy Tutor, a luxury real estate agent who recently joined Compass.

The city is in shock, she said, with people focused on immediate concerns, like housing displaced families who have been evacuated or lost their homes, including many of her own friends and clients.

“There’s a very big pause in the city right now, where people don’t know what to do,” Tutor said. “So many displaced families. Their entire lives have been wiped out in a matter of 24 hours.”

The catastrophe is likely to exacerbate an already dire housing crisis in the Los Angeles area, where a shortage of inventory has priced out the majority of home buyers, pushing up both home prices and rents, which is true across California.

The state is facing a shortage of 3.5 million housing units and fewer than 100,000 homes are built each year, The Wall Street Journal reported last August.

The shortage has led to housing prices that are completely out of reach of the average Angaleno.

The median sale price of a home in the city was $1.8 million in the third quarter, for both single-family homes and condos, according to data compiled by Jonathan Miller of appraisal firm Miller Samuel. The median price of a home in Pacific Palisades was $3.8 million, in line with the previous year, according to the same data.

And disasters like this one only make things worse in terms of housing, Miller said.

“Sales activity plummets but pricing doesn’t plummet, generally speaking,” he said. “Because the replacement homes will by definition be new construction.”

A particular challenge after disasters, and specifically in this case, is the rising cost of insurance. California was already facing a challenge in both the cost and availability of property insurance, and it’s likely that a significant portion of the destroyed homes were underinsured, or not insured at all.

That may be because many major insurance carriers have left the state, or refused to sign new accounts because of the high level of risk. State Farm, for example, announced that it was leaving the state in April 2024, which means homeowners may have had to scramble to find replacements.

“So many insurance companies have left the state of California,” Tutor said. “I absolutely would say people are underinsured.”

That’s particularly true in the luxury market, where the value of the homes increases the risk for insurers, as well as for people who have bought homes in the last two years, as the availability of insurance carriers dwindled, she said.

In the aftermath of a disaster, rising insurance costs then contribute to higher overall pricing, Miller said. “Because the insurance costs rise, it prices out more people,” he said. “And the market shifts to the high end. More high end.”

Early estimates from AccuWeather and other sources has put the damage of the Los Angeles fires above $50 billion, but the destruction is far from over with the fires still 0% contained, said Jon Schneyer, director of CoreLogic’s catastrophe team. “The fact that these fires are not contained, anything you determine can be wildly out of date in 6 to 12 hours,” he said.

CoreLogic estimates the total reconstruction value of homes in Los Angeles County with moderate or higher risk of wildfire exposure to be $186 billion. Over 70,000 homes have the highest level of exposure, at a replacement cost value of over $60 billion, per CoreLogic modeling.

Both of the larger fires ignited in areas known as the “wilderness urban interface,” where urban development means natural land, which is most vulnerable to wildfire damage because it combines the natural brush with the fuel of urban construction, said Schneryer.

“Once flames get into a developed neighborhood, it can very quickly spread through an entire neighborhood,” he said. “We call it urban conflagration.”

What makes fires different from other types of disasters is that while floods and hurricanes may also be geographically concentrated, there’s no direct relationship between the destruction of one home and its neighbors. In a fire, however, if one home catches fire, the probability that the neighboring home will burn too goes way up.

That makes homes at risk of wildfire harder to insure, since the risk of one home is compounded by the risk of another.

When Los Angeles looks to rebuild, it may be an opportunity to rethink some of the regulations that have contributed to the housing shortage.

“From a permitting standpoint, to build in Malibu, you typically would wait three to five years for a permit,” Tutor said. “To rebuild this part of Malibu would take 15 years if they go at that pace. That can’t happen.”

It will also face the challenge of insuring the rebuilt housing stock.

“It’s a challenge that’s not unique to California,” said Miller. A similar story is playing out “in the Midwest with tornados and the Southeast and Northeast with flooding. Every year the claims are breaking new records so this is something that has to be solved for the housing market to function.

“Right now, the focus is making sure everybody’s safe,” he said. “But once the event passes, what’s going to be done differently than before?”