Shake it up Baby
Chuck Ponzi June 23rd, 2006
Picked up on the news wire yesterday by several local news outlets (including the Daily Bulletin)was a warning that the south end of the San Andreas Fault has not made significant moves for some time and has a substantial amount of potential energy built up and ready to go at any time.
Using eight years of data from satellites that precisely measure ground position plus 20 years of global positioning system data, researcher Yuri Fialko with the Scripps Institution of Oceanography at UC San Diego concluded the plates are moving about an inch per year.
But the southern segment of the fault hasn’t budged since about 1690, more than 300 years ago, meaning the pressure is not being released.
When it does go, the fault could lurch up to 30 feet and generate a magnitude 8 quake, the same size quake that destroyed San Francisco in 1906, which occurred along the fault’s northern section. No quake that size has rattled California since.
Is anyone worried about what this could do to the value of homes?
If you’re thinking a large quake would lower the value of homes, you might be wrong, or you might be right.
Housing (land) prices are primarily a funtion of supply and demand. Land has no production cost (site preparation notwithstanding), has a very long shelf-life, and its value is primarily determined by location and intended use.
In wikipedia’s description of Economic Rents (which should not be confused with the layperson’s definition of rents), land is the sole producer of economic rents… a factor of production.
In classical economics, analysis focused on three factors of production — land, labour and capital — each of which earned a distinct type of income — rent, wages and interest, respectively. These three categories or types were used to explore what determined the distribution of income. It was observed that higher wages or higher interest rates might be expected to draw additional labor or capital to market, but higher rents did not induce God to make any more land; the owners of land rented or made useful all the land they had, regardless of the going rent. Still, some land commanded considerably higher rents than other land. Since only a minimal rent was necessary to bring land into some kind of productive use, almost all of any rent earned must be attributed to market competition to determine how land was to be allocated to particular uses.
In short, location is a prime determinant of value because of the concepts of centrality and transport (where you produce and how much it costs to transport yourself and/or goods). California property is valuable primarily because it produces the greatest amount of income from rents. Local businesses are successful, and pay their employees to stay in an area of rising costs if they can. Rents are established by the productive use; housing people or companies. This is the primary reason that local recessions produce falling land values and local booms produce rising land values.
What would an earthquake do to change the value of housing in Southern California? Would it raise it or lower it? Let’s look at the following conflicting forces:
1. It would raise the value
Increased demand and sudden and substantial decrease in supply would mean more users would be competing for fewer pieces of habitable property.
An assumed cost of tighter building restrictions would further increase site preparation costs and decrease production of land.
Additional demand on construction resources for reconstruction purposes would raise the cost of construction locally.
2. It would lower the value
Fence sitters, or marginal users would be forced out of the area. They would likely relocate where their income could support them.
Buyers would discount the value based on the potential of future earthquakes. Where the risk had previously been uncertain, present memories would influence long-term decisions.
Companies (which typically have longer working-spans than average people) will formulate business risk decisions that include moving from the area, decreasing demand.
Companies required to pay higher insurance and taxes would find decreased competitiveness in our global environment and seek lower-cost inputs (locations) if any exist.
However, I think most importantly, discussion of potential devastating earthquakes only lowers the value. Like FDR said, “The only thing we have to fear is fear itself.”
Imagine you were a clairvoyant living in New Orleans some time before Hurricaine Katrina and you had a premonition that a flood could destroy your house completely. Would you wait around and see if it really happened, or would you find some way to reduce your risk? The rational person would reduce the potential risk.
Bubble or not, widespread discussions of potential catastrophic events could lower the value of land in Southern California.
P.S. As a sidenote, about 2 years ago, the Discovery Channel aired a similar story where scientists estimated that over 25% of the housing in Orange County at the time would not be able to withstand a Northridge-sized earthquake. If anyone remembers that story, please feel free to comment with the name.
John Doe,
I don’t know of the show that you speak of (i.e. the Orange County homes withstanding shakes, etc.), but I can tell you that as an engineer (who happened to do his thesis in building motion control from seismic events), the OC buildings are made of paper…literally.
On one hand, that gives a flexibility required to transfer energy of the moving ground. One the other hand, strength is given up.
I’m sure that California regulations play a part in building construction regardless of location…but man are the homes over there going to move. Not ony that, the region may have a VERY large risk factor of liquifaction.
Liquification is when the ground water below the solid surface seeps through the ground up to the top during violent shaking….it essence flooding the ground with water and then simply making the effected ground turn into mud or sand. It happened in many places in Japan during large earthquakes. Any building in these areas will almost immediately topple under its own weight.
While this may be a harsh thing to say, earthquakes are the reality bringers to this unreal world we live in. I realized this after going through the Northridge earthquake which was one of the most disturbing events I’ve been through…even after studying such a phenomenon.
The Northridge quake was too kind…the damage was patchy and that was due to seismic waves amplified due to resonance from nearby bedrock at the foothills. That’s why we saw area that were untouched next to areas that were devastated.
An Andreas slip would be devasting to the whole region…it would bring this place to its knees…and that’s the Andreas fault…I won’t even mention the large faults right UNDER downtown LA. The proximity of those faults to LA in general is absolutely lethal.
Will the prices tumble??? Like the buildings themselves…
I just haven’t made up my mind on what earthquakes do to prices. One of my best friends is a contractor who lived through the Northridge quake and basically says that the earthquake saved his business. The area was already taking some serious hits in housing, and while it didn’t bottom until 95-96, it was already a long-time sliding before the earthquake. That was primarily job losses related before.
But, anecdotally, I know of a lot of people who said their neighbors simply walked away from their homes and left the state. The building became impaired, and they let their insurance and lender duke it out. For many people back then, 50K was a lot of money that they could never dream of paying off. My, how times have changed!
I certainly don’t understand the mechanics of it, but yes, there were a lot of places that were essentially falling down while a few blocks away, the structures were untouched. Someone once tried to explain the whole liquefaction and bedrock concept to me, but I still don’t have a full command of it.
I think that a healthy dose of fear is good, though. It keeps risk premiums where they should be.
Hey John,
The easiest way of describing liquifaction is that image the ground turning into sand…that’s pretty much exactly what happens. It loses all supporting strength due to the shaking of the ground and simply becomes “loose.” So you can image what happens to a building that’s resting on that surface.
Check out this link to understand better…it’s extremely interesting:
http://www.ce.washington.edu/~.....what1.html
The bedrock issue can be understood this way:
Image what happens when you release a drop if water in your tub…it sends out waves that are circular away from the point the drop hits the water. Those waves keep traveling until they hit the side of the tub…at which point they bounce off the wall (i.e. bedrock) and come back towards the center point.
The waves coming back interact with the waves going out…some “cancel” each other…others add to each others strengths…that’s called resonance.
Depending on where homes were located, this is what happened to parts that were untouched and severely damaged.
At this point a quake is about the best thing that could happen to Southern California because everybody could take their billions in FEMA dollars and buy something somewhere else, before the housing market down there crashes.
O.K. this has my attention. I live at the beach in a high rise. Would beach areas be more vulnerable to liquification?
LA renter
Yes, I think that’s pretty much a given. I liked nozferatu’s link, and it describes on one of the pages how high rises can be properly guarded against liquefaction, but if it’s older than the Northridge earthquake, I wouldn’t count on it standing if it’s a strong one. If you’re over the hill from the last big one, the thing that probably saved it last time was the sepulveda hills.
LA Renter,
Generally speaking they combat liquifaction near coastal areas by filling in solid foundation before placing beams and columns for the structure such as a riser in which you live.
However, be warned. It is neither the first or last time strengthened high rise buildings specifically designed to withstand liquifaction have failed. It’s quite common and more of an engineering underestimation more than anything else.
The world’s best prepared country is Japan…and it was devastated in the 1995 Kobe quake….to the utter shock and dismay to a host of scientists, engineers, and designers who all thought they were absolutely ready.
I don’t envy coastal living at all for that reason. I prefer mountains where strong bedrock exists and shaking is reduced substantially.
As far as FEMA helping. I seriously doubt it. The way they handled Katrina was an utter embarrasment and IF they come rushing and give aid to all these “white” folk in Cali…then it will pretty much confirm all the ideas of bigotry and racism that exists in this oh so wonderful adminsitration we currently live under.
Since earthquake insurance is prohibitive everyone just kinda pretends the big white elephant in the corner isn’t really there. Any sizeable earthquake in the greater LA area sufficient to “red tag” homes will bitchslap prices for the entire region. It will also provide an excuse that doesn’t reflect on the real estate industry.
Thanks for the info, I think? So in addition to having to deal with a housing bubble there is also a the possibility of dealing with housing rubble. It kind of reminds me of that Talking Heads song “Now how did I get here?”
nozferatu, I think it’s an overestimation to say that Kobe was prepared for its quake. Most of the deaths came from two sources: older residential buildings with the traditional paper walls— and ceramic tile roofs, and commercial buildings buit on alluvial soil (the liquefaction-prone fill.) Those buildings on alluvial soil had not, in fact, been anchored properly to deal with such things.
I was in high school at the time and in a competition science group. The Kobe quake was brought up in a practice session and we did quite a bit of research on the topic. One of the things that was rather appalling in retrospect was the fact that the building codes were not only looser than those of Southern California, but were applied inconsistently. The concept of retrofitting— something which has gone on in most public buildings in California— was not applied with any force. So you ended up with a situation where your building could be decades out of code in terms of earthquake safety.
Yeah, SoCal isn’t prepared for a major quake. But neither is Seattle, and certainly not Missouri… and both are prospects for major future quakes, possibly even reaching towards 9 on the Richter Scale.
B. Durbin,
You are correct in certain aspects that much of the severe damage leading to death was caused by the older style buildings and structures.
However, the Kobe earthquake damage was not an overestimation for the following reasons. In the scientific community may things were realized reinforced construction…which is essentially the norm for most building methods in California.
Reinforced concrete theory was put to the test and failed miserably in the Kobe quake. Many design methods that were believed to be correct for years were all made obsolete.
There lies the danger of overestimation. Who knows what will happen…we’ll only know when it happens.
I was in Santa Monica watching my bedroom wall open and apartment flood during the 94 quake. I remember the weeks following when about a third of the people I spoke with were ready to move back to Oklahoma or Michigan or some place like that. Of course, this was after riots, fires, long decline in housing market and long recession anyway, but the big quake seemed to inspire fear in a lot of people who had resisted those other things. So I looked at some statistics and noticed that a single tornado in Oklahoma (which had a population of 1.5M) had killed more people than had been killed in all the quakes in CA (which had a pop of 24M at the time) during the previous 30 years. Fears are not rational but they are ever so real. Big quakes will hit RE prices in a big way and a devastating quake would devastate prices for at least 5 years. However, people forget.
Yeah, we think we’ve tamed nature, but it’s like taming a big cat— the lion or tiger always has you at a disadvantage, and a bad day could end with it tearing your head off.
We do the best we can and don’t worry. Not everybody can live in the Willamette Valley (safe from most natural disasters, barring flooding and an explosion of Mt. Hood big enough to vaporize the western half of the state.)