Economic Perspectives - 08/14/26

A major fire is not simply a short-term property loss event. It is an economic event that lasts far longer than the immediate rebuilding efforts. It is dangerous to assume a wildfire event is simply a “destroyed, rebuilt, recovered” story. At its core, the success of a community in recovering from a wildfire event is heavily dependent on the recovery of the housing (shelter) market. The key is to bring back people who temporarily left when the wildfire event occurred. Without sufficient and affordable forms of shelter, temporary losses may become permanent losses. Reducing friction (constraints) is a vital part of providing sufficient and affordable shelter. The table at the end of the Analysis section provides documented, real-world examples of cities that reimagined and restructured their fiscal policy (i.e., permitting, zoning, types of shelter, etc.) to reduce friction and speed recovery.

Key Takeaways

• Immediate economic effects are sharply negative, particularly for property wealth, employment, shelter, leisure & hospitality, and small businesses.
  
• Reconstruction provides a partial offset as emergency aid, donations and insurance payments start to arrive. Proportionally, this economic benefit may not fully benefit residents who have been displaced.
  
  
• The intermediate period (6 months to 3 years) is potentially the most at-risk period. This is because emergency aid may be slow to be disbursed or may be receding while shelter and business activity may still be constrained.
  
  
• The long-term recovery for a community is heavily dependent on successfully bringing back the portion of the population that temporarily moved, insurance availability and affordability, speed of rebuilding the supply of shelter, and the pre-fire strength of the local economy.

Immediate (0 to 6 months)

Let us start with a macro viewpoint. From a macro view, the immediate economic impact of a wildfire event is asset destruction, evacuation, business interruption, lost business revenue, lost customers, emergency spending, and shelter displacement. 

Let us now bring the analysis down to a more micro level. Let us consider the multiple economic components impacted by a wildfire event.

Destruction of wealth and productive capacity
For those businesses and households within the fire zone, it may be a complete loss of a home or building or major smoke and water damage. The reality is that the initial impact is more than burned structures. The areas that represent potential balance sheet and/or wealth losses include:

• Business equipment and inventories, vehicles and infrastructure, lost business income and lost wages, cleanup and debris removal, smoke and water damage, lost tourism, and related spending

For most of these areas, insurance may not cover the full replacement cost. For businesses and households, that may mean out-of-pocket expenses (i.e., wealth reduction) to fully replace the lost or damaged items. For some businesses, that may mean downsizing the business (and employees) if insurance and emergency aid do not cover the cost to fully rebuild. For others it may mean going out of business. The result of these scenarios is a loss of productive capacity. It is important to understand that damage from a wildfire event is not captured in the economic data when measuring Gross Domestic Product. The Bureau of Economic Analysis counts the rebuilding of destroyed structures as new economic production, but it does not deduct the destruction of the original structure as a reduction to GDP. As a result, strictly measuring recovery via GDP may show a community has returned to the GDP level before the fire but fails to capture that the community may not be economically whole yet.

Shelter
A wildfire event results in an immediate reduction in available shelter and business structures. This does not just impact the people or businesses who lost their structures. The reality is that the economic impact affects the whole economy. The negative impacts may be the following:

• Rising rent prices for the whole community as displaced households compete for remaining rentals. Emergency workers and construction crews may also increase the demand and reduce the supply of rentals. This is a fundamental supply-and-demand problem: demand increases while supply is reduced. The increase in rental prices could then spread throughout the region and not just the affected community as people seek somewhere to live while rebuilding occurs.

• Rising building costs may occur as the surge in demand for rebuilding may drive up the cost of materials and labor. 

• Employers may lose workers who cannot find housing and temporarily move to another location. The most common cause of this is when a displaced family moves in with relatives who do not live in the community or region.

• The rise in “work from home” employees creates another potential loss of employees if the employee did not have their work equipment as part of their “go” bag. Working in the office may not be an option if companies downsized their office space since employees were working from home.

• Hotels rooms and vacation rentals may be diverted to displaced workers at a lower revenue level compared to what could be earned if used for its original intent. This impacts the Leisure & Hospitality industry as people considering visiting the community may not be able to find accommodations.

The economic impact is not all negative. Emergency aid, donations, and insurance payments that arrive in the immediate term help start rebuilding efforts as well as providing income for displaced households to find shelter. 

Fiscal Pressure
Local governments face the double pressure of a surge in expenditures while revenue is reduced. The increased expenditures include:

• Emergency response, debris removal, infrastructure rebuilding, temporary shelter, increased staffing costs, or overtime to manage the process for applying for, receiving, and disbursing federal and state disaster assistance.

While losing revenue from:

• Closed or reduced business hours, reduced spending from impacted households, reduced property tax collections, and lower revenue from tourism.

Income from emergency assistance programs, donations, and insurance payments will help offset some of these expenses but in many cases the reimbursement or disaster aid takes more than 6 months.

Intermediate Term (6 months to 3 Years)

From a macro perspective, the economic impact becomes a timing issue. The challenge for households, businesses and the community is whether rebuilding can happen fast enough to be completed before the disaster aid, donations and insurance payments run out. This may be the most economically challenging time if emergency assistance begins to run out but shelter and commercial rebuilding are constrained.

From a micro perspective the following economic factors are important to consider during the intermediate period.

Insurance, Financing, and Permitting
Insurance, financing, and permitting are critical drivers for the success or lack of a success for household, business, and community recovery. Recovery in the intermediate term depends heavily on the following;

• Were properties adequately insured? Speed and fairness of insurance claim settlements, mortgage obligations on destroyed structures, availability of construction loans, building-code changes, environmental remediation requirements, land-title and inheritance issues, repair of infrastructure (i.e., water, sewer, road and utilities), capacity of local governments to deliver a fast permitting process.

For many local governments, the administrative challenge of applying for, administering and disbursing disaster recovery funds can by a major challenge and contribute to the timing difference difficulties. To illustrate the potential issue of timing differences, a General Accounting Office study found that disaster recovery programs are complex and slow. One example cited was that as of July 2022, areas receiving HUD disaster-recovery block-grant funds for disasters that occurred in 2017 and 2018 had only disbursed 28% of the funds. 

Shelter Costs
The reality is that economic recovery is dependent on shelter recovery. Businesses cannot recover without workers, but workers cannot return without shelter, and shelter cannot be rebuilt without labor, infrastructure, and financing.

What the studies found is that shelter availability and costs can remain elevated past the initial emergency (immediate period). Although we could argue that Hawaii has unique dynamics compared to the rest of the US, data from the Maui wildfires highlights the challenge for shelter. The University of Hawaii study found that 18 months after the Maui fires, households were still paying 50% to 60% higher rent than before the fires. Just as important, the study found that 90% of former Lahaina residents were still displaced and 20% were below the poverty line. Even if Hawaii's recent example has some unique dynamics, the problem of shelter supply and costs is real for all communities impacted by wildfire events. The magnitude of the problem will vary by community and the destruction done by the wildfire event. An important point to highlight is that the form of shelter needed in the intermediate term may be different than the long term. If communities allow non-traditional forms of shelter for the intermediate term, it may be more successful in quickly bringing back people who left. One example (but not the only example) could be allowing an ADU to be placed on the property as the house is being rebuilt. 

Since restoring and increasing the supply of shelter is a critical component for both intermediate and long-term recovery, the table at the end of the Analysis section provides real world examples of cities/counties that responded to a wildfire event by re-imagining the shelter creation process. These are examples of actual changes implemented not just proposed. As you will see, shelter does not mean just traditional houses.

Employment
One of the studies published by Science Direct found that a major fire depresses employment for almost three years for counties that experienced a major wildfire event. The study found that the cumulative reduction in employment growth during that time was approximately equal to a 15% reduction from what the county's employment growth would have been without the wildfire event. The study identified that the employment effects were concentrated in counties that suffered wildfire destruction burning more than 1.5% of the county's land area. Not all industries were impacted the same.

• Tourism, retail, and local services remained weak; construction, engineering, and remediation employment rose; public-sector and nonprofit employment temporarily rose; workers may commute further or change to working in a different industry, 

• Small businesses may close permanently even if the county's aggregate employment eventually recovers.

Reconstruction
Reconstruction efforts bring clear benefits to the community but may also create problems. 

Benefits include increased demand for the following:

• Contractors and skilled construction workers, engineers and architects, building materials, trucking, waste removal, financial, legal and insurance services.

All of this may create the benefit of raising wages for workers in those areas and increasing spending in the community. Add the emergency aid, donations and insurance payments and you have income that helps the community with the recovery process. It should be noted that not all the income/spending may stay in the community if contractors, suppliers, and workers are located out of the community and do their spending outside the community.

The risk is that the increased demand for the above areas may result in:

• Labor shortages, higher construction costs, raw material inflation, shelter shortages, increased rents, competition for funds between public and private projects, delays and higher costs for building or remodeling projects for unaffected areas of the community, and infrastructure strain until rebuilding is completed.

Long Term (More Than 3 Years)

From a macro view, the two factors that play the biggest role in determining the recovery path for a wildfire-impacted community are return of the temporarily relocated population and available and affordable shelter. 

From a micro perspective, the following areas influence long-term recovery.

Temporarily Relocated Population
What the studies found were the major factors that can result in a household deciding to leave permanently included:

• Slow and drawn-out reconstruction (i.e. several years), insurance proceeds are inadequate, comparable shelter is not available, schools and health care services are disrupted or diminished, employment prospects were already weak before the fire, a wildfire event changes people's thought process, and the community is now viewed as a bigger wildfire risk than previously understood.

• A new factor that can be added to these factors is whether their company allows 100% remote work. Depending on the labor force dynamics that develop for a wildfire-impacted community, companies that did not support 100% remote work before the wildfire event may be forced to consider allowing 100% remote work if they cannot find sufficient labor to fill their job openings within the community. This has a long-term impact on population and labor force growth if your workforce does not live in or near the community.

• Although not specific to wildfires, a century-long study by the National Bureau of Economic Research (NBER) done for all natural disasters found that severe natural disasters increased county out-migration by approximately 1.5 percentage points.

Real Estate
The US Forest Service conducted a study of the impact on home prices after a wildfire event and after a second wildfire event in the same area. Its study found that homes within 1.75-mile radius of a wildfire experienced an initial drop of 9.71%. If another wildfire occurs within that same radius the drop becomes 22.68%. Intuitively, that appears logical as people may think one wildfire event was a “one-off” event but if a second wildfire event occurs later, then people may start to think that the community is a repeat wildfire risk. The study did not track how long it took for home prices to return to levels at or above where they were before the first wildfire event occurred. Much of that depends on the other factors affecting the desirability of a community.

The NBER study also found that severe disasters reduced housing prices or rents by approximately 2.5% to 5.0%.

The question is whether real estate prices recover or become impaired. Conditions that support recovery include:

• The region remains highly desirable, insurance remains affordable and available, infrastructure is restored quickly, demand for shelter remains higher than available supply, buyers expect the rebuilding to result in newer homes and amenities.

Conditions that may result in real estate prices remaining impaired include:

• The area is now viewed as an ongoing fire risk threat; insurance becomes unaffordable or unavailable; the local economy loses businesses and/or labor force; utilities and infrastructure remain inadequate; the community develops a stigma as an unaffordable place to live with reduced amenity values.

Insurance
Insurance has become a major factor in the long-term recovery efforts for a community. The following types of changes can affect all households and businesses in the community, not just those impacted by the wildfire event:

• Higher premiums, higher deductibles, reduced or lost coverage if insurers exit a market, mandatory vegetation management, difficulty obtaining insurance will translate into difficulty obtaining a mortgage, which ultimately hurts shelter prices, and greater reliance on insurers of last resort, which is more expensive.

In essence, if these factors occur, insurance acts much like a higher property tax for the shelter owner. This translates into a higher annual cost to occupy a home or manage a rental property. This may result in a lower price that buyers are willing (or able) to pay to compensate for the higher insurance cost.

Change in the Composition of a Community's Economy
Wildfire devastation can change the composition of the community and thus the community's economic structure. Risks to consider and monitor:

• Small businesses fail due to the destruction that occurred. This risks large chain stores becoming a higher concentration in the community and local decision-making being eliminated.

• A community may lose its lower-wage service workers if rents remain elevated and the community is no longer viewed as affordable. As a result, temporarily relocated lower-wage service workers do not return and service industries face labor shortages.

• Property ownership becomes more concentrated.

• The construction and professional-service industries may become a larger concentration of total jobs in the community. A lack of diversity of jobs across industries creates economic risk if something negative happens to one of the concentrated industries.

• Reduced tourism or a tourism model that is different than what worked in the past.

• Households become more concentrated in higher-income households as lower income households do not return due to affordability issues. This creates a labor force issue for businesses that need lower and middle-income households to fill open jobs.

• Loss of entrepreneurial and institutional knowledge if the people with that knowledge relocate to a different area and do not return from their temporary dislocation.

Capital Improvements
Long-term rebuilding from wildfire destruction can clearly improve the capital structure of a community. Potential examples include:

• New residential and commercial structures, updated and modern utility systems, improved roads and evacuation routes, fire-resistant construction, improved permitting and zoning, more efficient land use, better broadband, and public facilities.

It is important to understand that a physically improved community may not mean a fully recovered community. It may result in a different community than what existed before if original residents have moved away, previous renters are unable to return, and local businesses may have failed. The worst scenario for the local government is spending the money to make the improvements only to find that you do not have sufficient population to pay for the improvements via the normal tax sources (i.e., property, income tax, and excise tax).

The recent example of this is the University of Hawaii study of the Maui fires. Tax-filing data found that the Maui fires contributed to a loss of 1,000 residents and of those 1,000, between 400 to 500 people left Hawaii. The University of Hawaii study estimated that the population loss would reduce Maui's annual income by approximately $50 million.

We have reviewed the potential economic impacts of wildfire events and the importance of available and affordable shelter to bring back that portion of the population that temporarily relocated. The natural question that may arise is “are there examples of communities that amended policies to encourage more shelter to bring back their populations?” The answer is yes. The table below identifies cities that have had wildfire events within the last 10 years and what they did.

To me, the most interesting common theme in these documented cases is that innovation was not “hire more staff for permitting reviews.” These cities and counties have fundamentally changed the sequence and structure of the development regulation process. A second observation from these cases is that faster rebuilding and increasing housing supply are not necessarily the same policy. By that I mean a recovery strategy that enables a small ADU, modular unit, manufactured house, trailer, or temporary dwelling to be occupied on the property in the immediate term while the permanent structure is completed in 2 to 3 years could speed the return of the temporarily displaced population faster than a strategy that is focused exclusively on accelerating the rebuilding of conventional single-family homes.

Table of Cities That Implemented Changes After a Wildfire Event