How Have the California Wildfires Impacted The Local Real Estate Market?

With over 4 million acres burned, this year’s California wildfires have been the largest the state has ever seen. One fire alone, the August Complex, has burned over 1 million acres, cutting a destructive swath across the northern part of the state. The California fires are in various stages of containment, so these numbers could go up before year’s end.

California also happens to have some of the most expensive real estate in the country and many of the country’s most active real estate markets. Many areas currently battling fires have been threatened by wildfires before.

CoreLogic‘s (NYSE: CLGX) 2020 Wildfire Risk Report shows 1,975,116 homes in the United States are at risk of being destroyed by wildfires. These homes carry an associated reconstruction cost of over $638 billion. Of the areas most at risk, 76% of them are located in California, with the Los Angeles, Riverside, San Diego, and Sacramento metropolitan areas topping the list of places with the largest number of single-family homes with the potential for being burned by wildfires.

More than homes

The Glass Incident Fire has had a particularly devastating effect on Northern California’s wineries. The fire has burned over 67,000 acres, including over 30 wineries and restaurants. These businesses not only lost their physical structures but also many wine cellars holding thousands of bottles, including rare and valuable vintages.

The fire hit during the heart of harvest season, not only putting an end to tourism traffic but also preventing many wineries from completing their harvests. While many grapes have been harvested, the potential for smoke taint — a smoky flavor that gets into wine — remains high. This could have a direct impact on the future value on future earnings for these businesses.

This isn’t the first time the Napa area has been damaged by fires. In 2017, the Atlas Fire burned over 51,000 acres. While many of the wineries will rebuild, the impact on the tourism industry and wine production could be long-lasting.

But what about home values?

In 2018, the town of Paradise, located in the Sierra Nevada foothills above the northeastern Sacramento Valley, was nearly completely destroyed by the Camp Fire. Many people, including my own mother-in-law, moved on after they lost their homes. Others stayed and rebuilt. Before the fire, median home values in Paradise were around $264,000. Values shot up after the fire when inventory dropped because so many homes burned down. Now, according to Zillow (NASDAQ: Z) (NASDAQ: ZG), home values are around $277,000.

Data from the California Association of Realtors indicates August sales in Napa County were up 52.5% year over year and prices were up by 24% to a median price of $867,000. Napa and Sonoma sales have risen in recent months as some workers in San Francisco moved to the area because they could work from home. Sales of single-family homes for the entire state were up by 14.6% year over year in August.

When property values are high, owners tend to rebuild rather than move away. They’re also more likely to have an insurance policy that can help them start over. Rebuilding has become such a common process in California that a start-up, Homebound, helps people rebuild. The start-up is focused on streamlining the process of getting insurance money and using it to rebuild. Homebound has raised over $50 million in venture capital and helped over 150 victims of previous fires start over.

Whether it makes sense to rebuild is another question entirely. Paradise, which rebuilt thousands of homes over the past two years, was threatened in September by the spread of the Bear Fire. Rebuilding may start to cost more, especially as lumber prices rise. There are also concerns more homeowners, especially those in rural areas, will be dropped by their insurers and forced to rely on California’s FAIR plan, an insurer of last resort for property owners. The California Department of Insurance reported insurers paid out about $25 billion in claims after the 2017 and 2018 fires.

Says Dr. Tom Jeffery, principal hazard scientist at CoreLogic: “When we talk about wildfire trends, it’s important to treat any decrease in fire activity as only temporary. Like most natural hazards, there is no reason to believe that the amount of wildfire acreage, or the number of homes in the path of future wildfires will be any less — and certainly the ongoing 2020 season is proof of that, well on its way to being among the most devastating in recent memory.”

Despite the danger, home values in desirable communities in California are expected to rise over the next year. Even as fires turned the sky orange in San Francisco and ash fell like snow over many areas, homes continued to transact at a brisk pace.

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