Association for Public Policy Analysis & Management

Background. Many families live on the financial edge, but a natural disaster—flood, wildfire, tornado, or hurricane—can throw even better-situated families into financial turmoil. A natural disaster can lead to increased debt and delinquencies—increasing financial stress in the near term—but also longer-term declines in financial health.

Research Questions. We address the following research questions:

• What are the effects of natural disasters on residents’ financial health, as measured by credit scores, debt in collections, bankruptcies, and foreclosures?
• How do the effects differ by severity of the disaster, and by the demographic and economic characteristics of residents and the communities they live in?

Data and Methods. FEMA data identify which communities have been hit by a natural disaster, credit bureau data are used to measure people’s financial health, and the ACS data provide contextual information. Our models compare the financial outcomes of residents in affected areas to otherwise similar individuals in comparison communities. We identify comparison communities using propensity score matching, where the comparison zip codes are drawn from the universe of zip codes that were not affected by a natural disaster (from 2010 to 2017). To estimate the effects of natural disasters on individuals’ financial health (e.g., credit score), we again use a propensity score matching model.

Preliminary Results. Four general themes emerge from our analyses:

• Disasters lead to broad, and often substantial, negative impacts on financial health. We find evidence of negative impacts across most measures of financial health, including credit scores, debt in collections, bankruptcy, credit card debt, and mortgage delinquency and foreclosures.
• The negative effects of disasters persist, or even grow over time, for important financial outcomes. While living in a community hit by a medium-sized natural disaster leads to a 5 percentage point increase in the share with debt in collections one year after the disaster, this negative effect doubles to 10 percentage points by year four.
• Medium-sized disasters, which are less likely to receive long-term public recovery funding, lead to larger negative effects on financial health than large disasters. We find more substantial credit-score declines among residents hit by medium-sized disasters (22-point decline) than large disasters (10-point decline).
• Individuals and communities more likely to be struggling financially before disasters strike are often the hardest hit by the disaster. People living in communities of color hit by medium-sized disasters experienced an average 31-point credit score decline, compared with a 4-point decline for people in majority-white communities. This pattern suggests that disasters have the effect of widening already existing inequalities.

Implications. Our findings provide insight into strategies to promote resilience and recovery for multiple actors—government leaders (local, state, federal), philanthropy, nonprofit leaders, and regulators. For example, our main findings suggest post-disaster programs and resources should consider long-term financial needs, in addition to more immediate needs. Also, a larger share of recovery resources should be aimed at communities struggling before the disaster hit. These and other recommended strategies were informed by interviews with experts.