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Rising From the Ashes: How Will the Wine Country Wildfires Affect Its Housing Markets?

Pacific Union Chief Economist Selma Hepp examines the implications of the devastating Wine Country fires on the Napa and Sonoma county real estate markets.

Executive Summary:

  • The Wine Country wildfires are estimated to have destroyed about 2,800 homes so far, or about 5 percent of Santa Rosa’s housing stock.
  • The current property damage approaches $4 billion.
  • With rents and home prices already growing robustly, there will be further pressure on prices given the region’s already tight inventory.
  • City and county building permit processes will be key to the Wine Country’s recovery.
  • An attitude of optimism anticipates the rebuilding process.

Unfortunately, wildfires are a harsh reality of living in California, especially during the month of October. Thousands of fires burn throughout the state every year, but October seems to be the deadliest. Historically, six of California’s seven most destructive wildfires have happened in October.

According to CAL FIRE data, before the Wine Country fires started last week, there were more than 6,000 fires recorded in California year to date, with almost 480,000 acres burned. On average over the last five years, about 4,400 fires occurred on 201,360 acres of land between January and October.

CAL FIRE estimates that 12 large wildfires have rampaged through California over the past 10 days, killing 41 people, burning more than 245,000 acres, and destroying an estimated 5,700 structures. In Santa Rosa, about 2,800 homes have been destroyed, which amounts to about 5 percent of the city’s housing units.

Even at the current numbers, which are not final, the Wine Country fires are more devastating than the Bay Area’s last big wildfire, which happened in the Oakland Hills in October of 1991. That fire destroyed 2,900 structures on 1,600 acres, killing 25 people and injuring 500 more. The damage was estimated at $1.5 billion in 1991, which in current dollars amounts to $3.4 billion.

While it is difficult to assess how long it took the affected Oakland communities to completely rebuild, the process began about six months after the fires. According to a story in the Los Angeles Times, “the city streamlined the building-permit process for fire victims … and 18 months after the disaster, huge new housing developments were well underway.” The recovery took about four years, but according to U.S. Census Bureau data, not all units were rebuilt. In two ZIP codes that were impacted, 94618 and 94705, there were 86 fewer units in 2000 than there were in 1990.

Nevertheless, while not all residents returned, some of those who did took the opportunity to build larger homes. Before the fire, most homes in the Oakland Hills were built in the 1920s and 1930s and had two or three bedrooms, with a median value of about $300,000 in the early 1990s. When the new homes were rebuilt in the mid-1990s, with five and six bedrooms and three-car garages, the median home value jumped to more than $700,000. Today, the median home price in those neighborhoods exceeds $1 million and ranges up to $4 million. And despite the continuous danger of fires reigniting in the area, it remains a desirable place to live. Those who did not return sold their charred land to investors, who built massive homes that are now selling at multimillion-dollar prices. There are many lessons to learn from the Oakland Hills fire, and many comparable stories will emerge from the disaster in the Wine Country.

Multiple challenges exist in Northern California’s current housing market. Specifically, in Sonoma and Napa counties, for-sale inventory is extremely low and new construction is insufficient to meet buyer demand amid strong economic conditions and an influx of buyers who are looking for relatively more affordable housing than they can find elsewhere in the Bay Area.

In September, the median home price reached $587,000 in Sonoma County and $614,000 in Napa County, according to MLS data. Besides Contra Costa County, which had a September median sales price of $571,000, the two North Bay counties offer homes at half the price of San Francisco, Silicon Valley, and Marin County. Strong demand for affordable units led to an average 15 percent year-over-year decline in for-sale inventory of homes priced below $1 million in both counties. In contrast, higher-priced inventory has been growing, especially in Sonoma County. However, there are definitely more willing buyers than available homes in the Wine Country. In the two counties combined, the months’ supply of lower-priced homes (less than $1 million) is only about 1.5 months, which means that at the current rate of sales, all available homes available would sell in less than two months. A balanced real estate market requires at least six months of supply.

New construction in the region has picked up, and there are about 1,500 total new housing permits projected in 2017 for Sonoma and Napa counties combined. However, with 1,800 households also expected to migrate to the region, supply hardly meets demand. Figure 1 illustrates the year-over-year change in the number of households and the annual number of total building permits issued. In Sonoma County, current construction levels are at half their average of about 2,300 since the 1980s. Also, in the last 10 years, Sonoma County added little more than 10,000 new units for the 18,000 households that moved in during the same period.

At the current rate of new construction of 1,200 new housing units built in Sonoma County per year, it would take about 2.5 years to replace the 2,800 properties that have been destroyed by the wildfires. It will be crucial for the city of Santa Rosa and Sonoma County to streamline the building-permit process for fire victims, as Oakland did following the 1991 fires.

Nevertheless, homes prices in Sonoma County continue to appreciate at a robust rate, despite analysts’ expectations of slowing. According to John Burns Real Estate Consulting, median home prices in Sonoma and Napa counties were expected to increase by about 5 percent in 2017. September median home prices in the two counties showed 8 percent price growth year to date. Granted, the increase in median home prices could be driven by more sales of higher-priced homes than occurred last year, but nevertheless, it represents the available inventory and is representative of the situation that Wine Country homebuyers face.

While it may take more time and additional analyses to fully comprehend the fires’ impacts on the North Bay housing market, heightened demand for homes is already being felt in the region and is pushing up rents at a striking pace. Anecdotally, Pacific Union real estate professionals have already experienced increased demand for rental units — even offers from insurance companies that are willing to pay exorbitant prices for active listings. For example, one Pacific Union listing that previously rented for $4,000 received an offer for $13,000 per month from an insurance firm. Another listing was offered $18,000 per month for a one-year lease. Demand in neighboring Marin County communities has also increased over the last week from displaced Wine Country families.

The question is how sustainable this type of demand is and what most displaced families who cannot afford such prices will do. Sonoma County’s rental market was already tight, with only about a 3.5 percent vacancy rate, and one-bedroom apartment rentals in Santa Rosa averaged $1,636 before the fire. And unlike Houston or Dallas, which were recently affected by hurricanes, California has in general been undersupplied with new housing for decades. According to an analysis by the McKinsey Global Institute, California’s supply gap is already at 2 million units, and that number is projected to increase to 3.5 million by 2025.

What is the longer-term impact on the Wine Country’s economy and housing markets? As the Oakland Hills incident and other California wildfires have shown, it takes communities about a year to return to some level of normalcy. However, all of those housing markets recovered, and some developed into higher-priced neighborhoods with larger homes. Sonoma and Napa counties are some of the most desirable locations to live in the state, and the persistent demand over the years has shown that people are often willing to take a risk to live in a beautiful location, even if the property insurance comes at a higher cost. Existing Sonoma and Napa county residents have already shown incredible resilience and a desire to rebuild their communities.

Selma Hepp is Pacific Union’s Chief Economist and Vice President of Business Intelligence. Her previous positions include Chief Economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo, and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.

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Just Listed! New Modern Estate in Ross, Ca featured in SF GATE!

Inspired by its unique natural setting and blending effortlessly with the land, one is prompted to think this newly built five bedroom, four and a half bath home is the manifestation of a lost design from an early modern master.  Although clearly a nod to legendary modern design, this masterwork brings us into the 21st century with cutting edge architecture, construction, energy efficiency, state of the art technology, ultra high-end interior and exterior design and finishing with the ultimate integration of indoor spaces with nature.  Skillfully designed to integrate wholly within its mostly flat over half acre site, this residence stretches out comfortably upon this lush, tranquil setting.

SF GATE FEATURE

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Pacific Union’s April 2017 Real Estate Update

Bay Area real estate markets are having a strong spring showing, as April’s median sales price for single-family homes set or tied a one-year high in Contra Costa County, the East Bay, Marin County, Napa County, San Francisco, and Silicon Valley. Stay up to date on the latest market statistics of note with Pacific Union’s April Real Estate Update.

You’ll find it exclusively at Pacific Union

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The Bay Area and California: Home to America’s Happiest Residents

Homebuyers flock to California for its plentiful jobs, pleasant year-round climate, stunning natural beauty, and multitude of outdoor-recreation opportunities. That all adds up to the happiest residents in the nation, with Bay Area cities at the top of the pack.

A recent analysis by WalletHub ranks 150 U.S. cities on a scale of 100 based on how happy (or unhappy) the people that live there are. The study uses 30 different metrics across three major categories to gauge happiness: physical and emotional well-being, community and environment, and income and employment. WalletHub notes that finances only influence happiness up to an annual income level of $75,000, then cease to have an effect.

The nation’s happiest residents can be found in Fremont, with an overall score of 77.55. The Alameda County city ranks No. 1 in the nation for community and employment — the latter criteria no doubt aided by the presence of Tesla Motors — and No. 2 for emotional and physical well-being. When considering individual criteria, Fremont has the nation’s smallest divorce and separation rate and ties Irvine, California for the lowest obesity rate.

The Bay Area’s two largest cities also rank among America’s five happiest places. With an overall score of 75.79 San Jose ranks No. 2 and is the country’s top city for emotional and physical well-being and third best for employment. At No. 4, San Francisco scores a 69.20, with the country’s second best employment ranking and third best state of well-being. San Francisco also has one of the lowest obesity rates in the U.S., hardly a surprise given that WalletHub recently named the city as the country’s healthiest.

California cities account for eight of the nation’s 10 happiest places and 13 of the top 20. Irvine ranks No. 3, followed by Huntington Beach (No. 6), San Diego (No. 7), Oakland (No. 8), Santa Rosa (No. 9), Chula Vista (No. 11), Santa Clarita (No. 12), Garden Grove (No. 14), Anaheim (No. 18), and Glendale (No. 20).

So if Californians are all smiles, where can the country’s least content residents be found? Nine of the 10 unhappiest cities are located in the Midwest or the South, with Detroit earning the dubious distinction as America’s most downtrodden place to call home.

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Pacific Union Forms Strategic Partnership With Smart Home Pioneer Nest Labs

Pacific Union is proud to announce that we’ve formed a strategic partnership with Nest Labs, an innovator of smart-home technologies.

The deal pairs two innovative, forward-thinking companies in order to benefit Pacific Union’s real estate professionals and clients. Through the partnership, the first that Nest has forged with a real estate brokerage, Pacific Union professionals gain the opportunity to offer their clients Nest Labs product packages — created especially for the brokerage by the smart home leader — to help make their lives better and easier.

“This alignment of brands is ideal for Pacific Union,” Jessica Frushtick, Pacific Union vice president of marketing says. “We continue to push technology forward in our industry, and Nest leads the world in creating technology for the secure and efficient homes that our clients are seeking.”

Founded in 2010, Palo Alto-based Nest Labs produces a range of smart home products, which are fully integrated through the company’s newest redesigned app. The partnership with the company will enable Pacific Union real estate professionals to equip their clients with the following products, all of which can be remotely controlled and accessed from a smart phone:

  • The Nest Learning Thermostat™ and Nest Energy Services, which learns a homeowner’s energy-usage habits and automatically adjusts climate-control systems accordingly
  • Nest Protect™, a smoke and carbon-monoxide alarm that alerts homeowners to potential hazards via a human voice
  • Nest Cam™, an indoor and outdoor video and audio security system that records activity in the home and alerts homeowners to potential disturbances and issues via their smart phones
  • Additional Nest and Google products from Alphabet

Smart technologies have the potential to increase a home’s value, according to research from John Burns Real Estate Consulting, which found that two-thirds of buyers would pay more for a home that is equipped with smart devices. Smart home systems can also help cut insurance bills, as we explained in this November blog post.

To learn more about the partnership with Nest Labs, contact me.

DISCLAIMER: All information furnished regarding property for sale, rental, comparables or financing is from sources deemed reliable, but no warranty or representation is made as to the accuracy thereof and same is submitted subject to errors, omissions, change of price, rental or other conditions, prior sale, lease or financing or withdrawal without notice.