Rents likely to increase rapidly in wake of L.A. wildfires
The devastating wildfires in Los Angeles County are expected to create a significant shock to the local housing market, potentially leading to a sharp increase in rental prices in an already undersupplied metro area with low vacancy rates, where rents have remained stagnant over the past year.
As of now, the wildfires have burned more than 54 square miles, destroyed approximately 10,000 structures, and forced the evacuation of 180,000 people.
"Doubling or tripling rent growth is absolutely possible," said Selma Hepp, chief economist at CoreLogic, in an interview with MarketWatch. Hepp added that displaced homeowners seeking temporary shelter may rely on informal arrangements not accounted for in traditional real estate models, which could push rents even higher.
Jay Lybik, CoStar’s director of multifamily analytics, echoed similar concerns, projecting that rents in Los Angeles could rise by 8% to 12%, as reported by MarketWatch. The disaster is expected to have a ripple effect on the housing market across Southern California.
Protections Against Price Gouging
California Governor Gavin Newsom declared a state of emergency for Los Angeles County, which includes provisions to prevent price gouging. According to the California Attorney General’s office, landlords are generally prohibited from raising rents more than 10% above pre-emergency levels. For properties not previously rented or advertised, rents cannot exceed 160% of the fair market value determined by the U.S. Department of Housing and Urban Development, as reported by the Los Angeles Times.
The Housing Context in Los Angeles
Los Angeles County’s housing market is already under immense strain. Data from county officials shows that 54% of residents are renters, with nearly 60% of them classified as cost-burdened, spending over 30% of their household income on rent. The multifamily market's vacancy rate is among the lowest in the nation, with an occupancy rate of 95.2% and an average effective rent of $2,257 per unit at the end of Q3 2024, according to Colliers.
Skyrocketing home prices have further restricted access to the single-family home market, with the median sale price for single-family homes and condos reaching $1.8 million in Q3 2024, per appraisal firm Miller Samuel. Meanwhile, the city is falling behind on its housing production goals, needing to add 457,000 units by 2029. In 2024, Los Angeles issued only 3,860 multifamily building permits as of November 30, marking a 10-year low, according to Crosstown LA.
Insurance Market Impacts
The wildfire damage is likely to trigger higher insurance rates statewide. Insurers have already begun pulling back from renewing policies in wildfire-prone areas, pushing many property owners into California’s FAIR Plan, the state’s insurer of last resort. According to the San Francisco Chronicle, the FAIR Plan has $25 billion in exposure in areas affected by the wildfires but holds less than $400 million in reserves for claims.
Under state law, if the FAIR Plan is overwhelmed, it can levy charges on private insurers, which may pass those costs to their policyholders. State regulators are working to attract insurers back to the market by allowing them to factor reinsurance costs into their rate hike applications. Following the wildfires, these rate hikes could be steeper than previously anticipated, said Michael Wara, director of Stanford University’s Climate and Energy Program, in comments to The Chronicle.