If you count yourself among the unlucky residents of Southern Florida where Hurricane Irma looks likely to make her continental U.S. landfall, you may want to take notice of a new study just published by Kelly Edmiston of the Federal Reserve Bank of Kansas City which details the devastating toll that hurricanes can take on your hard-earned credit score.
Edmiston’s study, entitled “Financial Vulnerability and Personal Finance Outcomes of Natural Disasters,” limited its analysis to the effects of category-1 storms but still found that credit scores are typically crushed by 50 points for the average household and even more for families that are already on weaker financial footing before storms roll through.
In general, the results suggest that those who are financially better prepared for a natural disaster tend to have better financial outcomes. The cumulative effect of the interaction variables is significant, even for relatively mild storms Tracts with low share of the population with unpaid bills (arbitrarily set at 1 percent), the aggregate effect of a category 1 hurricane on credit score was a reduction of 16.2 percent. For a tract with an especially high rate of unpaid bills (arbitrarily set a 5 percent), the effect is strikingly larger in magnitude at -81.2 points. The median (3.09 percent) yields an average reduction in credit score of 46.4 points. Thus, half of tracts affected by category 1 hurricanes saw an average reduction in credit score of more than 46.4 points. This result would drop an average credit score of 700 to just over 650, which would likely significantly affect credit terms on a new loan. These cumulative effects were significantly higher than expected ex-ante. Results from Specification 2 show a very similar pattern, with credit score reductions ranging from 17.9 percent with a 10 percent credit card utilization rate to a staggering 71.2 percent for those with a 40 percent utilization rate.
Similarly, people with higher credit card utilization rates before storms hit also tend to see disproportionately high drops in their post-storm credit scores.
Of course, as we noted earlier, the estimates above are related to category-1 storms which presumably means that the impact of a storm the size of Hurricane Irma could be far more devastating.
So what causes the drop in credit scores? Infrastructure loss and reduced business incomes are just the beginning…
The initial, unanticipated shock of a major natural disaster generally causes significant disruption in economic activity in the affected area. Among the direct losses incurred are damage to or destruction of physical assets such as homes, businesses and business inventories, automobiles, and public infrastructure, as well as loss of life. Disasters also are known to significantly increase psychopathologies in affected populations, such as dazed confusion, disabling grief, and post-traumatic stress disorder (Perry and Lindell, 1978; Neria et al., 2013).
Substantial indirect losses typically follow and may include unemployment, losses in business revenue, reductions in tourism, and associated fiscal impacts, such as reduced tax revenues. Despite a significant number of studies that have explored indirect losses associated with natural disasters, no “rule of thumb” has emerged to assess indirect losses as some equivalent to the magnitude of direct losses (Cochrane, 2004, p. 37).3
Brown et al. (2006) estimate initial job losses from Hurricane Katrina at 232,000 in Louisiana and 58,000 in Mississippi. The U.S. Bureau of Labor Statistics (BLS) (2007) estimates that the combined job loss of Hurricane Katrina for the eight most affected county-equivalents (parishes in Louisiana) in the following year was 128,000—88,000 of which occurred in Orleans Parish (New Orleans). In a study of 19 hurricanes making landfall in Florida between 1988 and 2005, Belasen and Polachek (2008) estimate that declines in employment of as much as 4.8 percent for high-intensity hurricanes (measured as category 4 or 5 on the Saffir-Simpson scale, discussed below) in counties that were directly hit. Even if employment returns to pre-disaster levels, a change in the mix of jobs may lead to a mismatch of skills and employment opportunities, resulting in significant unmet employment needs and relatively high levels of unemployment (Venn, 2012).
So, after you live through the storm, you always have this to look forward to…
The full study can be read here:
via http://ift.tt/2xbMylA Tyler Durden