(Bloomberg) -- Los Angeles already had a housing affordability crisis before devastating wildfires burned entire neighborhoods to the ground. The disaster is making it worse.
Incoming calls at LA Estate Rentals, which manages and leases homes in some of the area’s costliest neighborhoods, have jumped to 500 a day, more than 10 times the number before the fires, said owner Patrick Michael.
He recently arranged for a tenant to pay $35,000 a month for a place in Beverly Hills with a 12-month lease. After the fires but before the deal closed, the owner raised the rent to $40,000.
“What’s going on in the real estate market is disgusting,” Michael said by phone. “People are price gouging. It’s become like the eBay of homes, a bidding war.”
The nation’s second-largest metro area has long been one of the least affordable US markets to buy or rent. Now the pressure is intensifying because the fires that killed at least 24 people also destroyed more than 12,000 structures, many of them homes. That’s creating a large new group of people up and down the income scale who suddenly have nowhere to live.
“Anybody that would take advantage of that desperation is shameful,” Los Angeles Mayor Karen Bass said Tuesday, adding that she’s discussed price gouging with the district attorneys for the county and city. “Both of them are very clear that they’re going to be on the lookout for this type of thing.”
Only about 5% of Los Angeles apartments were vacant before the fires, with a median rent of $2,299, real estate service CoStar Group Inc. reported. The market was even tighter in the areas affected by the fires. The vacancy rate was 3.8% in Pasadena, near the Eaton fire, and 2.1% in western Los Angeles County, where the Palisades fire is burning.
Since evacuees are naturally looking for residences close to their burned properties, the competition is fiercest in areas that were already tight. Demand for furnished properties, which cost more, has soared because many prospective tenants lost all their belongings in the blazes.
“There’s so much demand,” said Aaron Kirman, chief executive officer of Christie’s International Real Estate Southern California. “I have two leases that each got 20 applications.”
Zillow Group Inc. has pulled down hundreds of listings that appear to violate price-gouging rules since the fires began, said Alex Lacter, a representative of the company. Zillow is exploring new processes to identify gouging, but for now, it’s assigning workers to investigate listings that have been flagged by users.
Ads for rental homes are popping up on the web, posted as bait by people who claim to represent properties, said Michael at LA Estate Rentals. Callers are often told the properties have already been taken. Then they’re offered a completely different house at a steeper price.
At his own firm, Michael had 200 listings before the fires. Now he’s running out of inventory.
“There’s nothing of good quality in the $10,000 to $20,000 range in Santa Monica or Brentwood,” he said.
The effect is if anything more painful for people in less rarefied parts of the market. Many Angelenos at lower or mid-income levels have lost their homes and most possessions, and often lack deep savings accounts they can tap into to compete in an increasingly expensive housing market.
Prices typically spike following natural disasters, at least briefly, said Jay Lybik, CoStar’s national director of multifamily analytics. Two prominent examples: Hurricane Katrina in New Orleans in 2005 and Houston’s Hurricane Harvey in 2017.
One big difference now, however, is that flooded houses in Gulf Coast areas could be restored more easily than the Los Angeles homes that burned to the ground and need total rebuilding, Lybik said. In New Orleans, much of the population never returned after Katrina. In Houston, new construction costs less and faces fewer regulatory hurdles than in Southern California.
“The market is already very tight” in Los Angeles, Lybik said. “The absorption of displaced households will have a bigger impact on the overall market.”
That impact will unfold across a city that already places big financial stresses on buyers and renters. In the third quarter, only 15% of households could afford the area’s median priced home of $827,000, according to the California Association of Realtors. Buying a house at that price would require a minimum annual income of $207,600, almost double the US average, the association said.
It’s a similar story for renter households in Los Angeles. About 56% of them are considered to be rent burdened, meaning they spend more than 30% of their income on shelter, according to Redfin Corp. Renters displaced by natural disasters often face more challenges relocating because they may lack insurance and the thousands of dollars required to make deposits for a new lease.
It’s still too soon to see a measurable change in housing data, according to Stuart Paul, US economist for Bloomberg Economics.
“At this point it looks like it’s upper-end, Westside landlords that are experimenting with aggressive price hikes,” he said.
He cited the example of a listing for a four-bedroom home in Santa Monica that went from $8,750 in November to $12,500 after the fires and then dropped to $9,950 on Tuesday.
California law prohibits raising the price of consumer goods, including housing, by more than 10% after an emergency, which Governor Gavin Newsom declared last week for the Los Angeles area. Violators of anti-gouging laws can face up to a year in prison and $10,000 in fines plus civil penalties.
“The California Department of Justice takes seriously all reports of price gouging and is working with our law enforcement partners to investigate all leads stemming from the Southern California fire,” a spokesperson for state Attorney General Rob Bonta said in an email.
A law on the books is no guarantee of enforcement, however. Los Angeles passed an ordinance in 2019 restricting short-term rentals, such as Airbnbs, but it has been frequently ignored.
Homeowners with a mortgage are required to have insurance, though their policies may not cover all the costs of rebuilding and replacing possessions as post-disaster prices spiral upwards. The state-backed FAIR Plan, an insurer of last resort for homeowners in high-fire risk zones, limits coverage to $3 million for a residence.
Amid the fierce competition, many owners of homes burned in the Palisades fire are paying out of pocket to secure rentals rather than wait for insurance payments, Michael said.
“Whoever pays the most — and has the cleanest deal — gets it,” he said.
--With assistance from Kate Seaman.
(Updates with comment from LA mayor in sixth paragraph. An earlier version of this story corrected the name of the rental firm owner in the second paragraph.)
