Feb 5, 2025
Southern California grapples with economic fallout from historic wildfires
Southern California is facing a long and arduous recovery following the devastating wildfires of January 2025, which are expected to be the costliest in US history. The blazes, fueled by strong Santa Ana winds, have not only resulted in immense physical damage but also threaten to leave a lasting economic impact on the region. Experts warn that the road to recovery will be long, with significant challenges to the local economy, housing market, and insurance industry.
Devastating Impact and Economic Losses
The wildfires, which include the Palisades and Eaton fires, have charred more than 50,000 acres, destroyed more than 16,000 structures and caused 28 fatalities. Preliminary estimates assess the damage and economic losses at over $250 billion, with at least 12,300 homes, businesses, churches and schools destroyed. The fires have not only displaced thousands of residents but also disrupted business operations, particularly in the tourism and film industries.
“This will have a major impact on the local economy, no doubt, as a lot of people live in those areas,” said Tatyana Deryugina (right), an associate professor of finance at Gies College of Business. “Many had to evacuate and experienced severe disruptions to their daily routines. Those who lost their homes have had their lives have upended. Even though the fires are essentially contained, the disruption they caused is ongoing. Unfortunately, I think it’s safe to say that this is the costliest US fire of the past century.”
Housing Crisis and Rising Rents
The destruction of more than 10,000 homes has triggered a housing crisis, with experts predicting surging rents and increased construction costs. The high demand for housing and construction will make rebuilding a slow process, putting additional pressure on the already strained Los Angeles housing market. Deryugina expects that not everybody is going to get to rebuild their home as quickly as they can, which is going to create pressure on the area's housing market and real estate. She also believes that housing prices will go up as many residents have been left homeless and intend to remain in the area.
Insurance Industry Under Strain
The wildfires have also made the continuing insurance crisis in California increasingly problematic, with insurers struggling to cover the extensive damage. Many insurance companies have nonrenewed tens of thousands of policies in fire-prone areas, and experts predict that insurance companies will continue to restrict providing insurance protection in high-risk areas.
“The insurance crisis was already underway before this fire, as many areas in California are vulnerable to fire, flood, or both. We have seen insurance companies decline to renew coverage,” Deryugina said. “I expect more insurers to pull out of these high-risk regions, and premiums will likely keep rising. Moreover, what’s classified as high-risk will probably expand to include even more communities.”
Deryugina has repeatedly served as a scholar for the Office of Risk Management and Insurance Research at Gies College of Business. The office helps fund research on critical issues facing the insurance industry and engages students seeking careers in risk management and (re)insurance.
The office’s director Lynne McChristian (left), a senior Instructor of finance at Gies, recently told Crain’s Chicago Business that laws in California did not allow insurance companies to accurately assess the cost of risk.
“California insurance regulators were not letting insurance companies use catastrophe models in pricing their rates. Those models are a tool to help insurers accurately assess future risk. Ignoring data from catastrophe models is like driving with your eyes closed,” McChristian said. “Those restrictions were lifted in December and are awaiting final approval.
With fewer private insurers willing to write new policies, homeowners have been seeking fire coverage through the state-mandated insurance pool, called the California FAIR Plan. All licensed property/casualty insurers who provide insurance in the state are required to participate in the FAIR plan by writing coverage that is proportional to its California market share.
Long Road to Recovery
Experts believe that the local Los Angeles economy will face substantial short-term and long-term challenges. Deryugina says that the economic toll of a disaster comes from interruptions in business activity such as entertainment, manufacturing, and other industries specific to an area, such as the film industry in Los Angeles.
The recovery will not only be dependent on the scale of the fires but also the availability of emergency funds and the willingness of people to remain in the area.
“This can affect the area’s long-term economic growth, especially depending on how many people leave,” Deryugina said. “If an area can attract newcomers and continue to grow, it will be better positioned to rebuild.”
Full recovery, especially for those uninsured, may never come, with many communities facing years of rebuilding. While the national economy may not be significantly impacted, the local economy will undergo significant changes. It may take years to rebuild the area.
"I think rebuilding is going to take some time,” Deryugina said. “Partly because the demand for materials will be high and the demand for labor will be high.”
Effects of Blaze Likely to be Experienced Nationwide
Beyond the economic impacts, the health repercussions of the wildfires are likely to be felt thousands of miles away from California. A study coauthored by Gies Business professors David Molitor and Nolan Miller reveals that wildfire smoke, which can travel thousands of miles, has a far-reaching impact on public health, especially for older adults. The study, which examined wildfires from 2007-2019, found that wildfire smoke causes over 191,000 emergency room visits and about 10,000 premature deaths annually in people aged 65 and older. The research integrates extensive data from NASA, the EPA, and Medicare, and calculates that the economic cost of these smoke-related deaths is approximately $100 billion per year. The study highlights that many areas, including parts of the Midwest, experience more days of smoke exposure than California, with Illinois alone averaging over 40 days annually.
"The mortality costs of wildfire smoke are substantial,” Molitor said. “While people often focus on fire suppression and property damage, the broader health impacts—more than 10,000 premature deaths and nearly 200,000 extra ER visits annually—create a much larger economic burden."
The study also emphasizes that even smaller smoke plumes, not just the thickest ones, can have serious health effects, though the exact biological or behavioral reasons behind this are still under investigation. Researchers hope the findings will raise awareness and lead to better air quality measures, ultimately benefiting public health and reducing long-term economic costs.