Wildfires Ravage Southern California: Economic Fallout Ahead
As the devastating wildfires sweeping across Southern California continue to claim lives and destroy properties, the road to recovery will be long and arduous. With estimated losses already ranging from $135 billion to $150 billion, two industries are poised to bear the brunt of the disaster: homebuilding and property insurance.
Homebuilders Face Uncertainty
Despite the surge in new construction activity in the Greater Los Angeles area, the largest homebuilding ETFs have yet to show signs of optimism. The $3.3 billion iShares U.S. Home Construction ETF (ITB) and the $2 billion SPDR S&P Homebuilders ETF (XHB) have been lackluster, with minimal gains in midday trading Monday. This is a far cry from their strong performances in 2023, when ITB surged 69% and XHB climbed 60%. However, their momentum has slowed in 2024, with ITB gaining 2% and XHB rising 10%. Both ETFs are currently down about 2% this year, amidst a broader market downturn.
A Macro Perspective
Chris Chen, wealth strategist at Insight Financial Strategists, notes that while the wildfires are catastrophic, the total property damage must be viewed in context. “With 1.3 million dwelling units built across the country in 2024, the impact of these wildfires is relatively small,” he explains. “While there may be a short-term boost to homebuilding ETFs, there shouldn’t be a sustained long-term effect.”
Insurance Companies Face Financial Burden
On the flip side, insurance companies will be tasked with financing much of the economic recovery. The $928 million SPDR S&P Insurance ETF (KIE) and the $740 million iShares U.S. Insurance ETF (IAK) have been flat over the past five trading days. Chen observes that insurance companies have reserves to cover claims, which will limit the impact on earnings. “Additionally, insurance companies often have reinsurance to fall back on in case claims exceed their reserves,” he adds.
A Long Road to Recovery
As the wildfires continue to rage on, the full extent of the economic toll remains to be seen. One thing is certain, however: the road to recovery will be long and challenging for both homebuilders and property insurers.
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