Grapevine

Research finds homeowners use credit strategically to recover from hurricanes

A massive storm can instantly sweep away someone's dream home, as we've seen recently with Hurricane Helene and now Hurricane Milton. Millions in the Southeast have had their homes destroyed or damaged by these devastating storms, which are only becoming more frequent due to climate change.

Even with insurance and government aid, the financial strain can be overwhelming. So, how are homeowners managing to rebuild their lives? New research by Alejandro del Valle and Stephen Shore of Robinson's Greenberg School of Risk Science and Tess Scharlemann of the Federal Reserve Board explored this question by examining the financial responses of households to the flooding caused by Hurricane Harvey. Their research, recently published in the Journal of Financial and Quantitative Analysis, reveals that many homeowners strategically used credit to manage recovery costs while avoiding high-interest debt.

To gather their findings, the researchers combined detailed data on the extent of flooding after Harvey with credit card and mortgage records. This allowed them to track how households used credit in areas with varying levels of flood damage. By studying these patterns, they pinpointed how the severity of flooding influenced financial decisions. They also analyzed insurance coverage, building regulations, and income data to understand how factors like building codes shaped people's financial choices.

"We found that many households turned to low-cost borrowing options, like promotional zero-interest credit cards, to cover immediate costs without resorting to high-interest debt," said Del Valle. "Importantly, they didn't fall into cycles of expensive borrowing. This strategic use of credit suggests that homeowners in Florida and North Carolina, facing Hurricanes Milton and Helene, might respond similarly."

The study also revealed a rise in mortgage forbearance, a temporary pause in payments, especially in heavily flooded areas. Even some households not directly impacted by flooding took advantage of these offers, possibly due to indirect effects or as a precautionary measure.