By John W. Schoen Senior producer
updated 10/26/2007 4:54:29 PM ET 2007-10-26T20:54:29

As residents of fire-ravaged areas in Southern California began returning to their homes Friday, the full economic impact of the destruction was only beginning to be known. Though insurance claims and government emergency funds will cover some of the losses, the longer-term impact could weigh heavily on a region already reeling from a steep downturn in the housing industry.

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The full scope of the damage is still unknown, but as of Friday, seven deaths had been attributed to the series of fires, which destroyed some 2,000 homes and a half-million acres of public, residential and agricultural land. Preliminary estimates put the financial toll well above $1 billion; the final figure will likely be higher, according to economists and insurance officials.

"This situation here is the worst I've seen in terms of impact on individuals, families, homes, businesses," said Charley Wolk, who has been farming in San Diego County for 35 years.

Of some 23 fires, the so-called “Witch Fire” in San Diego caused the biggest property damage to date, and could result losses of as much as $1 billion alone, according to insurance consultants at Risk Management Solutions.

Those estimates would make this week’s wildfires among the costliest on record. A series of fires in 1991 in Oakland Hills resulted in total claims of between $3 billion and $4 billion in 2007 dollars; an October 2003 outbreak of wildfires in Southern California caused some $2.6 billion in losses, said RMS.

Video: Governator warns of fire fraud

Some economists worry that the damage could take a wider toll on the region’s economy. Losses to the tourism and farm industries won’t be fully recovered. Local governments’ budgets will be stretched by the unexpected costs of emergency services. Homeowners may well see insurance rates rise. And money diverted to covering damages is money that could otherwise be invested in economic activity that produces growth, according to Joseph Brusuelas, chief U.S. economist at IDEAglobal.

“The conflagration that has engulfed Southern California over the past four days has the potential of pushing a fragile regional economy into recession,” he wrote in a note to clients.

While highways and airports remained open, many schools and businesses were forced to shut down, resulting in lost sales for those businesses and lost wages for some workers. As those who were forced from their jobs return to work, the losses from missed wages and slower spending is expected to be limited.

Farmers hit by the blaze will take longer to recover. Though much of the state’s farm lands lie in the Central Valley to the north, some 11,000 acres of farmland were burned, according to county agriculture officials. About a third of the state’s avocado crop was believed to be in the fires' path, and officials say dozens of commodities, from eggs to oranges, along with an unknown number of nurseries, also suffered damage from the fire.

"Our losses will certainly be in the millions — it's just a question of whether it'll be tens of millions or hundreds of millions," said John Demshki, president of the Corona-College Heights Orange & Lemon Association, which packs citrus and avocados for about 600 farmers in Southern California.

The impact on tourist destinations was mixed. Popular destinations like Sea World and the San Diego Zoo closed down; hotels and restaurants saw increased traffic from local residents fleeing the fire.

The total cost of battling the blaze may take some time to make up. Though the federal government will provide some disaster assistance, California taxpayers will eventually have to find the money to pay that bill.

“The folks who may really be hurt the most proportionately are the state and local governments, which didn’t have the budget for the actual firefighting and cleanup,” said Steven Levy, director of the Center for Continuing Study of the California Economy.  “We’re very thin in our budgetary process out here; most folks are running barely even. So you could have some state and local agencies with unexpected deficits from the direct firefighting costs.”

Homeowners who suffered losses may be in better shape than those who filed claims after the 2003 fires, which touched off widespread complaints after many discovered that they were underinsured. Though many have now beefed up their policies, they still face losses from deductibles and losses that may not be covered.

Insurance rates for home owners in fire-prone areas may well be raised if the insurance industry can convince state regulators they face higher risk from future fires. Those who lost their homes to fire will also be hurt by the depressed housing market, since claims are based on current market values, which have been substantially depressed by the downturn.

Video: Governator warns of fire fraud

About the only beneficiaries from the disasters will be those hired to rebuild. As with all natural disasters, the bulk of insurance claims and disaster assistance flows first to the rebuilding of homes and other buildings. While that will be a welcome boost for the depressed construction industry, it won’t come close to making up for the building shortfall from the ongoing slump in the home building industry, which is running about 80,000 homes a year below peak levels, according to Levy.

“It’s nowhere near the amount of homebuilding that’s been lost because of the meltdown in the mortgage market and because the prices are too high,” he said. “It would be a drop in the bucket compared to the construction losses we’ve had.”

The rapid influx of insurance claims also brings the risk of further losses, as bogus contractors and other fraud artists target unsuspecting homeowners and businesses. California Insurance Commissioner Steve Poizner said part of his agency’s 300-person enforcement unit has already been redeployed to the area to try to make sure that those who suffered losses to the fires don’t get burned twice.

“It’s unfortunate, but it’s like clockwork — every time there’s a natural disaster, the scam artists show up and pretend to be claims adjusters or they’re unlicensed contractors,” he said. “And the victims can be victimized again. So we’re going to nip it in the bud before it gets started.”

The Associated Press contributed to this story.


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