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Katrina's Unintended Consequences

After the hurricane that devastated New Orleans, it was Houston's turn. Victims fled to the Texas city in unprecedented numbers. The extraordinary private-public cooperation resulted in the housing of over 200,000 Katrina victims in Houston alone.

Public administrators at all levels patted themselves on the back for responding to the crisis. Private owners no doubt smiled after filling a lot of vacant apartments with tenants whose rents were paid by various governmental entities.

But private-public cooperation did not guarantee that all parties would walk away satisfied with the outcome. As economist Muhammad Yunus, the 2006 Nobel Peace prize winner, has stated, “Give a homeless man money, and he'll eat for a day. But the next day, he'll be back.” Fortunately, Katrina victims were given money to tide them over for a short time. Unfortunately, the handouts increased and rolled on for far too long.

Appalling conditions

In the second half of 2007, I toured 15 apartment complexes in the Houston area, while considering an investment. These complexes had taken in Katrina victims, and were being advertised for sale as “fixers.” In fact, they were all in a catastrophic state of disrepair.

In November, I looked at a 240-unit Houston complex that had 62 paying tenants after evicting all non-paying Katrina victims. The carpeted rooms looked like they had been subjected to fraternity food fights for tens of semesters. Several units were destroyed by fires.

Fire happens everywhere, but I observed a number of units where paper was piled up on stoves and in ovens, then set on fire by disgruntled departing tenants. Some units were completely destroyed, while other arson attempts, fortunately, did not succeed. In many dwellings, evicted tenants had turned on water faucets and flooded the apartments, causing the units to be engulfed in mold. If the units were second-floor flats, the purposeful acts caused ceiling failures and floods in the lower units.

The project is now in the final stages of foreclosure and is for sale for about 60% of what it sold for just over two years ago. I drove by a 400-unit complex in the same area, with 200 units boarded up after Katrina victims had left, and did not bother to stop.

In another southeast Houston development with more than 200 units, the manager told me that Katrina victims were taken in and that she greatly regretted the results. The complex had the same trademark Katrina conditions: flooding in multiple units, filthy conditions, countless holes knocked into walls, and boarded-up units. It is now in the final stages of foreclosure.

Taking a financial hit

In a northeast Houston complex of 130 units, I observed even greater devastation. Half of the units toward the front were 100% occupied. The other half fronted another street to the rear. All the vacant units in the rear took in Katrina victims, and as long-term tenants eventually fled the resulting chaos, the management took in more victims.

Two years later, the 65 units on the front street are still clean and maintain long-term tenants. The 65 units on the rear street are 100% vacant and in a state of virtual destruction. Tenants or others ripped down walls and ceilings to gain access to copper plumbing and wiring.

I have walked into many apartments in extremely poor condition in the last three decades of rehabilitating housing, but after glancing in dwellings with missing doors and windows, I chose not to enter any of the destroyed apartments. This particular complex has a relatively low density of 20 units to the acre, looks very nice from the exterior, and in good condition, and would reasonably be worth $30,000 per unit. The property, however, is now in escrow at $11,000 per unit.

No one suggests that Katrina victims should have been turned away. What apartment owners did was a fine gesture, and they should be proud. But I bet that the prideful feelings have been overwhelmed by sick feelings and empty holes in wallets. As a Houston real estate investor said to me, “Tell the next horde of victims to pass over Houston.”

Houston apartment owners should have demanded rehabilitation guarantees from the various public entities that urged them to take in government-sponsored tenants. Such guarantees would have prevented tremendous loss of income and value in the Houston rental market.

Wayne Haaland is a general contractor and real estate broker in California and Texas. The author may be reached by email at [email protected].

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