How Will the Winds Shift for SoCal Housing Market After Wildfires?

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It’s the uncertainty that has kept Howard Behar on edge. From the windows of his four-bedroom Bel Air home in Los Angeles, the entertainment lawyer can smell the smoke. From his neighbor’s home, which sits on a canyon rim, he’s seen helicopters dumping water on the wildfires below.

He and his wife packed a car with a few changes of clothes, important documents, and a few select family photos—just in case they’re ordered to evacuate.

“I’m exhausted. It’s been stressful and scary,” says Behar, 67, who has lived in the home since 2001. “You’ve got to sleep with one eye open because you don’t know what’s going to happen. … [Wind] can shift.”

Just two months after the deadliest wildfires in California’s history, hundreds of miles to the north in the wine country of Sonoma and Napa counties, the state finds itself fighting a growing and dangerous conflagration again.

As of Friday morning, six wildfires in Southern California had torched 141,000 acres, 212,000 people had been evacuated, and hundreds of buildings had been damaged and destroyed, according to the most recent information from the California Department of Forestry and Fire Protection, or Cal Fire. Several people have been injured, but no casualties have been reported so far. The state has issued its highest fire alert.

More than 86,000 homes in Ventura and Los Angeles counties are at risk of damage from this latest round of fires, according to real estate data firm CoreLogic. That could cost $27.7 billion to rebuild. And these figures don’t include the more recent blazes that broke out in San Diego to the south and Riverside County, east of L.A.

Compounding the tragedy is that these are already tight housing markets. That could get worse as more displaced renters and homeowners compete for whatever unharmed abodes are available as they rebuild.

It could “exacerbate an already challenging market for buyers,” says Chief Economist Danielle Hale of realtor.com®. “People will probably look more toward apartments.” But there aren’t enough affordably priced rentals to go around either.

In all of California, nearly 2,045,000 homes are deemed at high or extreme risk from wildfires, according to the 2017 Verisk Wildfire Risk Analysis. That’s 15% of the state’s households, according to the insurance, natural resources, and financial services data analytics company based in Jersey City, NJ.

Lessons learned from October’s deadly fires

Usually after a major disaster, real estate prices drop. Buyers don’t want to look out their windows to see the burnt-out remains of their neighbors’ homes. Whole neighborhoods can become loud and messy construction zones as residents rebuild their beloved communities. And of course, there are always fears that another disaster could strike.

The October fires in Northern California killed 44 people, damaged more than 21,000 homes and 2,800 businesses, and cost more than $9.4 billion in insurance claims as of Dec. 1, according to the California Department of Insurance. About 100,000 residents were forced to flee their homes.

But instead of prices going down, they actually shot up in Sonoma and Napa counties after the tragic wildfires.

Median prices of single-family houses rose 6.1% in Sonoma and 7.5% in Napa from September to November, according to real estate brokerage Pacific Union.

In Santa Rosa, the Sonoma County city that was devastated by the fires, median home prices have risen about 9%, says real estate agent Daphne Peterson of Keller Williams Realty.  They typically fall this time of year as the market slows down ahead of the holidays.

So what’s going on? Despite the destruction, this is still an incredibly desirable area to be—so much so that folks are willing to take the risk. Many of the residents who lost their homes still want to remain in the area, and will pay whatever is necessary to do so.

That’s why in these sorts of anomalous places, prices can rise as a result of the disaster, says Orell Anderson, a national real estate appraiser with  Strategic Property Analytics in Laguna Beach, CA.

The fact that there weren’t enough homes on the market before the crisis only exacerbates the situation.

Undamaged homes are now receiving multiple offers and going as high as $100,000 to $200,000 above asking, says Rick Laws, regional vice president of Sonoma County for Pacific Union. And many buyers in the wealthy area, whose high-end homes were damaged in the flames, have the means to pay all cash.

“The majority of people here are saying, ‘This is my home, this is my neighborhood, this is my community,'” says Laws of locals who want to stick around as they fix up their homes.

“We’re going to rebuild and we’re going to make our community and our homes nicer than they were,” these locals say, according to Laws.

How natural disasters usually affect local real estate

That kind of topsy-turvy postdisaster price appreciation may not occur in Los Angeles and the other counties affected by these latest infernos. After most natural disasters, homeowners can expect to absorb a roughly 10% discount if they put their properties on the market, says real estate appraiser Anderson.

That’s because people buy neighborhoods as well as homes. So properties that were miraculously spared on burnt-out blocks are going to see the biggest discounts. (Buyers are unlikely to want daily reminders of the devastation.)

Los Angeles has some of the nation’s most expensive real estate, but the city is very different from the wine counties up north—vastly larger, more diverse, and perhaps less predictable. And it isn’t yet known which areas will be damaged.

Generally, most people after a disaster are risk-averse, and yet most will rebuild, Anderson says.

If a rebuilt home is later sold, it typically does so for about 5% to 10% less than the previous price. But that discount fades over time, and by five years or so, it disappears.

Rebuilding is likely to cost a pretty penny after the Los Angeles fires, as the demand for construction workers and materials, already tight in the region after the last round, will soar due to the demand.

Homeowners whose homes were burnt also have to contend with insurance companies paying out only home repairs. They typically don’t compensate policy holders for the value of the land, which in some parts of California can total about half of the property’s value—if not more.

And even those unaffected by the fire may not be fully safe—they need to be on guard against landslides, Anderson says. Many of the trees and plants incinerated in the blaze were anchoring the land on hillsides. Without those stabilizing roots, land could be more vulnerable during a big rainstorm.

“Natural disasters on this scale can put a thumb on the scale psychologically against people relocating to California,” says Patrick Carlisle, chief market analyst at the Paragon Real Estate Group in San Francisco. “However, unless the fires continue, people’s memories are relatively short.”

But it could induce some folks whose homes were destroyed or those already considering a move, like retirees, to leave, he says.

Wildfire season is lasting longer

Wildfires are fairly common natural occurrences in the western swath of the country. They rejuvenate forests as they help certain plants to reproduce. They’re usually problematic only when they burn through heavily inhabited areas, says Tom Jeffery, senior hazard scientist at CoreLogic.

The high, hot Santa Ana winds that typically whip up this time of year are making the situation even worse, pushing the fires through vegetation that dried out in the drought. That’s made the area “very susceptible to wildfires,” he says. The lack of rainfall is also intensifying the problem.

Wildfire season usually runs from late spring and early summer to midfall. By December, it’s usually over.

But “what we’re seeing more and more is a lengthening of that season,” Jeffery says. Some areas, including much of Southern California, now have year-round risks. “Unfortunately, there doesn’t seem to be anything in the near term that’s going to reduce this [wildfire] risk.”

That danger hasn’t made Bel Air homeowner Behar, and many more like him, want to move.

“This isn’t the first fire in California. And we have earthquakes, too, and we keep thinking about ‘the big one’ coming,” Behar says. “But you probably can’t go anywhere in the world where it’s completely safe.”

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