Gulf Oil Spill Changes Real Estate Equation

During the past few weeks there’s been an argument to be made that portions of the real estate marketplace were beginning to return, an argument that may have to be re-thought as a result of the Gulf of Mexico oil spill.

Across Gulf waters and shorelines that were once pristine we now have the threat of a major environmental disaster. Unless the BP oil leak is soon stopped or slowed, the damage to sea life and shore areas will take years to clean up. No less important, the damage will also be economic: A lot of Gulf Coast real estate will become less valuable each day the spill continues.

Off-Shore Realities
RigZone.com reports that the Deepwater Horizon, the Gulf rig that toppled over, was built by Hyundai at the Ulsan shipyard in Korea and delivered in 2001. The rig and related systems operated properly for nine years.
 
An important part of the drilling process is the installation of blowout preventers on the sea floor. Once installed, blowout preventers are then tested with some regularity — the New York Times says officials tested the Deepwater Horizon system just 10 days before the platform sank. (See: Solution to Capping Well Stays Elusive, April 20, 2010)

For some reason all systems failed, and now shrimp, shorelines and swimmers are threatened by a growing tide of oil-soaked waters. Various government officials and industry experts say it may be possible to get the blowout protector working, capture the oil or perhaps cover the well with a cement cocoon. If not, Interior Secretary Ken Salazar says a relief well will resolve the problem within 90 days.

But fixes may not be so easy. The leaking well is in waters that are 5,000 feet deep. An enormous amount of pressure is forcing oil out of the well and capping such seepage is not assured. No less significant, the hurricane season begins June 1.

Real Estate
It will take some time to figure out what happened with the Deepwater Horizon in a technical sense and to determine the extent of environmental damage, but from a real estate perspective the situation is clear: More risk has been introduced into the Gulf Coast marketplace, risk which local residents hardly need.

“This will be a financial calamity for many firms, not just BP and its partners and service providers,” explains David Kotok with Cumberland Advisors, an investment advisory firm based in Sarasota. “Their liabilities are immense and must not be underestimated. The first estimate of $12.5 billion is only a starter.

“Thousands of small and independent businesses as well as larger public companies in tourism are hurt here. This is not just about the source of half the nation’s shrimp. That is already a casualty. It’s also about the bank loans for the $200,000 shrimp boat and the house the boat owner and/or his employees live in and the fact that this stockpiles on a fragile financial system that is trying to recover from a three-year financial crisis.”

You can see where this is going. Oil pollution on a Gulf-wide scale means fewer jobs, less economic activity and steeper energy costs. Unless the spill can be quickly resolved, the result will be a substantial decline in property values along the Gulf Coast.

The Gulf-side communities of Cape Coral, Fort Myers and Naples in Florida are already among the largest metro foreclosure centers in the country according to RealtyTrac. Other areas along the Gulf will face tough times if the leak continues and pollution spreads.

But will there actually be more foreclosures in the event of a worst-case scenario? The answer is not so certain.

Foreclosures and Short Sales
“As we’ve seen in the past, disasters tend to behave in ways different than normal times,” says RealtyTrac senior vice president Rick Sharga. “Remember when hurricanes Katrina, Rita and Wilma hit the same region a few years ago? After the floods, foreclosure activity virtually dried up. There are still thousands of vacant homes in various stages of disrepair that are in a state of limbo: not occupied, no one making payments, but not in foreclosure either. I’m not sure we won’t see the same sort of thing this time.”
 
In effect, local markets along the Gulf Coast were so battered after the 2005 hurricane season that it made no sense for lenders to foreclose. Why bother to take title when values had been undermined and buyers could not be found? Why not allow people to stay in their homes to keep up maintenance and prevent vandalism?

What will likely make sense in the event of major environmental damage would be an increase in local short sales. Such deals would get owners out from the burden of their homes while lenders would not have to expand foreclosure rosters or endure further losses.

As this is written there’s been little damage to shorelines and beaches. Hopefully, tides and weather patterns will continue to protect coastal areas. Hopefully the leak will somehow be contained or shut off in far less than 90 days. But regardless of which way the winds blow, damage along the Gulf Coast is already apparent. A new element of risk has been added to coastal real estate, and more risk is hardly the way to push up property values.
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Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.

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