Far from burn zones, especially for renters and those with iffy credit, money troubles follow fires
It will take months for Southern California officials to total up the losses from two major fires that hit areas around Altadena and Pacific Palisades. Early estimates indicate in excess of $250 billion in wildfire losses, at least 28 people have died and over 16,000 homes and other structures destroyed, with 200,000 residents under evacuation orders at one point.
Los Angeles and the state of California are left to grapple with calls for a new level of preparedness in an era of climate change-intensified natural disasters. A city already suffering a housing shortage must accommodate those displaced and hurry along a rebuilding process too often stymied by severe delays in local government approval of new development. And investigators must determine how these fires started — and how future blazes might be averted.
All across the area, miles from charred ground, less dramatic yet significant fire-related losses are likely mounting, as well. A working paper by Federal Reserve Bank of Philadelphia’s Xudong An, UCLA Anderson’s Stuart A. Gabriel and Federal Reserve Bank of Dallas’s Nitzan Tzur-Ilan, examining prior California extreme wildfires, suggests that residents exposed to smoke from major fires often wind up accumulating new debt, falling behind on payments and suffering health problems that keep them from work.
More Dangerous Particles
In a carefully designed study, the authors draw on varied environmental and financial data to isolate these effects, focusing on areas beyond burn zones, in particular the area surrounding the devastating Camp Fire of 2018 that mostly destroyed the Northern California town of Paradise. The study is part of a widening effort by researchers, insurers, governments and health experts, all trying to better understand the human impact as climate change appears to produce more frequent and more extreme weather emergencies.
The authors of a separate related study find “that tiny particles released in wildfire smoke are up to 10 times more harmful to humans than particles released from other sources, such as car exhaust.” What’s more, yet another study shows, “Approximately one-third of U.S. households include someone with an existing respiratory health condition at risk of serious medical complications in the wake of prolonged exposure to the fine particulate matter (PM2.5) found in smoke. Hence households may experience adverse health outcomes and incur related medical or preventative health spending as a result of extreme wildfire-attributable smoke and particulate pollution events.”
While resources understandably are funneled to those whose homes were lost to fire, the researchers point out how widespread — though less studied — exposure to wildfire-related toxic smoke is becoming: “In June 2023, in the wake of 500 active wildfire events in eastern Canada, heavy smoke and particulate emissions blanketed 122 million people across major parts of the Northeast and North Central United States, resulting in some of the most polluted days on record.”
Studying the more and less proximate areas most hit by smoke but outside the Camp Fire burn zone, the authors observed, in the five quarters following the fire, increased credit card spending and slower repayment, resulting in an average net increase of $1,400 credit card balances. Renters and those with lower credit scores were most inclined to see rising loan delinquencies.
Heavy Smoke in Densely Populated Areas
The areas around Paradise, California, of course, are lightly populated, very much unlike the areas surrounding the Altadena and Palisades fires. The authors, well before the Los Angeles-area fires, sought to show how urban areas are affected. “If we conservatively impute estimated pollution effects of the Camp Fire to the 19 million people in the New York Metro Area exposed to similarly elevated levels of smoke and pollution in the wake of the 2023 Canadian wildfires, a back-of-the-envelope calculation suggests that affected households incurred an incremental $6 billion in credit card spending and an added $10 billion to credit card debt.”
People buy health-related items (masks, air purifiers, inhalers, etc.) to get through episodes of smoke exposure. Some miss work and thus pay and then have to borrow to buy food and other necessities. Disrupted lives are costly in many ways.
An, Gabriel and Tzur-Ilan’s paper looks at the period 2016-2020, a time of intensifying wild fires before the effects of the COVID-19 pandemic threw much economic data into disarray.
Overlaying neighborhood-specific air pollution data up to 30 miles from a fire’s perimeter, with household level information on credit card usage, mortgage data and consumer credit default rates, the authors find “new evidence of causal effects of wildfire-related air pollution on credit outcomes.”
Hyperlocal Data on Smoke Exposure
The researchers studied the smoke/air pollution caused by five major California fires that destroyed at least 1,000 buildings between 2016 and 2020. California has the dubious distinction of being the epicenter for recent extreme wildfires; 8 of the 11 most damaging fires in those five years occurred in the state.
The researchers leveraged an analytical framework published in 2021 that captures daily smoke exposure down to areas smaller than 1-2 kilometers (neighborhoods) based on data from the National Oceanic and Atmospheric Administration. They then studied the air pollution for those areas based on daily EPA data.
An, Gabriel and Tzur-Ilan sort census tracts by their level of pollution exposure after the fires and analyze the credit behavior of highly impacted households. For credit data they use a mix of sources including the Federal Reserve Bank of New York/Equifax Consumer Credit Panel. Equifax is one of the nation’s big three credit bureaus.
The average credit card balance for households within areas with a high level of smoke pollution — the 75th+ percentile — for the Camp Fire was higher by 7%, or by $290. For the other fires, it was more than one percentage point higher two years later.
When looking at the most extreme pollution caused by the fires — 90th+ percentile — the Camp Fire impact was much the same, and other fires produced different outcomes. For the Carr fire, the average credit card balance increased more than 10%, which was a decided shift from their findings at the 75th+ percentile, which showed a slight balance decline. The Thomas fire went the other direction, a slight credit card balance increase at the 75th+ percentile changed to a slight decrease at the 90th+ percentile.
In 4 of the 5 fires, mortgage default rates two years out had also ticked up for residents in the 75th percentile for smoke pollution. And for the one outlier — the LNU Lightning Complex — an insignificant decline in mortgage default at the 75th+ percentile became a significant increase at the 90th+ percentile.
Since these earlier fires, home insurance markets have been strained across the country and in particular in areas subject to wildfires and hurricanes and flooding. Premiums are up dramatically. And an increasing number of homes are underinsured, meaning coverage wouldn’t pay to rebuild them.
For California going forward, efforts to stabilize the home insurance market are crucial. And rebuilding efforts in the Palisades and Altadena will likely be hampered by less than timely and inadequate insurance claims payout.
More broadly, across the regions hit by fires — and ultimately, all climate change-intensified weather — the effort has only begun to understand the breadth of impacts on humans.
Featured Faculty
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Stuart Gabriel
Arden Realty Chair; Distinguished Professor of Finance; Director, Richard S. Ziman Center for Real Estate at UCLA
About the Research
An, X., Gabriel, S.A., & Tzur-Ilan, N. (2024). The Effects of Extreme Wildfire and Smoke Events on Household Financial Outcomes.