North Bay Area Home Prices Surge After Sonoma Fires

A shortage of homes for sale combined with strong demand continued to push up Bay Area home prices last month, and the situation is only going to get worse in the North Bay when those displaced by the wildfires seek new housing.

The inventory shortage is statewide but “particularly acute in the Bay Area,” the California Association of Realtors said in news release.

On Friday, CoreLogic reported that the median price of new and existing single-family homes and condos in Bay Area hit $739,000 in September. That was up 13.7 percent from September 2016, the largest yearly gain for any month since January 2014. It was down 0.1 percent from August, reflecting a normal seasonal slowdown.

The number of homes sold fell to 7,338 last month, down 13.6 percent from August and down 7.5 percent from September 2016.

It’s too early to know what impact the Wine Country fires, which started Oct. 8 and destroyed an estimated 8,800 structures, are having on home prices and sales in the North Bay. The CoreLogic report reflects transactions that were recorded in September.
Anecdotally, real estate agents say that sales in Sonoma County have picked up as buyers who were taking their time before the fires rushed to nab a house before demand from fire victims grows.

At the same time, “We’ve had a rash of fire victims buying for cash,” said Diana Gorsiski, president of the North Bay Association of Realtors. “Even if they are rebuilding, they know it’s going to be two to three years minimum.” Given the tight rental market, some would rather buy than rent in the meantime.

Some fire victims are looking into a loan for disaster victims backed by the Federal Housing Administration. Called a Section 203(h) loan, it’s made by qualified lenders to people who lost a primary residence they owned or rented in a major disaster and are rebuilding or buying another single-family home or condo.

Buyers can borrow up to 100 percent of the purchase price of the replacement home. When lenders are calculating the debt-to-income ratio on the disaster loan, they don’t have to count the mortgage on the destroyed home if they had adequate insurance and are working with their original lender to apply insurance proceeds to that loan, said Michael Regan, sales manager with Stearns Lending in Petaluma.

The maximum loan amount is the same for all FHA loans and varies by county: It’s $595,700 in Sonoma and $636,150 in Napa. Borrowers pay the usual FHA mortgage insurance premiums.

Regan has firsthand knowledge of the housing market. He recently purchased a home and was going to put his existing Petaluma house on the market just before the fires broke out. He waited a few weeks and listed it a week ago Saturday. By Saturday afternoon, he had two cash offers, both for more than the asking price. He said the last two homes in his neighborhood, Adobe Creek, sat on the market for 40 to 50 days before the fire.

“It’s definitely not the same market it was before the fire,” said Rick Laws, senior vice president with Pacific Union International in Sonoma County. People who “had the ability” began looking to secure housing even before the fires were out.

“We have some highly qualified and motivated renters and buyers who are offering significantly over-market prices,” for homes and long-term leases, he said. He suspects this flurry of activity will subside soon and things will become less volatile. But he also knows that “we are going to run out of housing before we run out of need.”

  Before the fire, Sonoma County had only three months of unsold inventory, meaning it would take three months to sell all homes on the market at the current pace of sales. Inventory averaged 2.2 months in the Bay Area (compared with a long-term average of 4.4 months) and 3.2 months statewide.

 There are many reasons for the inventory shortage. One is that new construction “remains well below anything close to a normal level historically,” said CoreLogic analyst Andrew LePage. New-home sales this year are 5.1 percent below last year’s level.

The Realtors association contends that many long-term homeowners won’t sell because their property taxes would go up if they bought a new home, even a less expensive one. In California, homes generally are reassessed for property taxes only when they are sold. Many long-term owners are paying much less than they would if they bought the same house today, which has a lock-in effect.

California homeowners who are 55 or older get a once-in-a-lifetime chance to sell their primary residence and buy another of equal or lesser value and transfer their property tax base from the old house to the replacement house. However, the new home must be in the same county or in one of 11 counties that accept transfers of property tax values.

Northern California Fires Put Communities in Shock

 

Late Sunday evening, Russel Lee was relaxing on his deck in Santa Ana, CA, drinking a glass of wine. Then he smelled the smoke. He checked the local police scanner app on his phone and learned that wildfires blazing out of control were moving in on his four-bedroom townhouse in Southern California's Orange County.

The 63-year-old real estate agent and his wife, an artist, dug out their three cat carriers and frantically began packing some clothes, valuables, and important paperwork. At around 1 a.m., the police came banging on the door, yelling: "Get out now!" The Lees made it to a makeshift emergency shelter at the local veterans center, along with some folks who hadn't had time to change out of their bathrobes and slippers before fleeing.

 

Their home was burned to rubble, and they lost nearly everything—including one of their beloved cats, Alya, who refused to get into her carrier in time. His wife's artwork, much of which she had already sold online, was all destroyed along with the antique furniture that had been in his family for generations. The couple are now living in their motor home parked on their friend's driveway.

But despite their devastating losses, Lee and his wife know they were lucky. Twenty-one people have died in the 22 large wildfires burning through seven counties, including the famed wine-producing areas of Napa and Sonoma, as of Wednesday, according to the California Department of Forestry and Fire Protection. About 3,500 homes and buildings have been incinerated by the blazes, which have ravaged about 170,000 acres, mostly in Northern California. (That's larger than the island of Manhattan.) The causes of the fires have not yet been established.

As firefighters struggle to contain the conflagrations, in the wine country north of San Francisco, it is clear that the region, an economic powerhouse for California, will continue to suffer long after the flames are extinguished and the human toll has been counted.

The disaster is expected to ravage the housing markets of this highly prosperous region, with slashed prices, scarce availability, and wrecked infrastructure—all factors that will need to be taken into account as displaced homeowners decide whether to return and rebuild, or leave the area for good. The multibillion-dollar tourist industry, and the jobs it provides, is also at risk. It's likely to take up to a decade to rebuild the homes, businesses, and essential services such as schools residents will need should they choose to return.

Wildfires are common in California, as well as the Western states of Washington, Oregon, and Colorado, in late summer and fall. But those burning in Northern California are unusual, says Tom Jeffery, a senior hazard scientist at CoreLogic, a real estate information company.

 

"When you have a wildfire occur in an area that's uninhabited, it can be a good thing for the environment. You have to have fires to have certain plants to reproduce" like certain pine species, he says. "[But] whenever you have homes exposed to it, then you have a potential disaster."

The median home price in Napa County was a whopping $876,200 on Sept. 1, according to realtor.com® data. In neighboring Sonoma County, home to hard-hit Santa Rosa, the median home price was $750,000. But that was before the fires.

More than 172,000 homes are now at risk of going up in flames in the Napa and Santa Rosa metropolitan areas, which are usually not prone to wildfires, according to an analysis from CoreLogic. (Napa is the name of a town as well as of the surrounding county.) It will cost an estimated $65 billion or more to rebuild them.

Californians are just beginning to come to grips with the scope of the disaster.

"Multiple neighborhoods are burnt out," says Randall Bell, CEO of the national real estate appraisal firm Landmark Research Group, based in Laguna Beach, CA, which has assessed areas damaged by wildfires. "It's street upon street of just charred-to-the-ground moonscape. All you see are chimneys and foundations. It's a sad sight—and you see hundreds of them."

 

WHAT WILL HAPPEN TO THE HOUSING MARKETS ONCE THE WILDFIRES ARE EXTINGUISHED?

Only about a quarter to half of the original residents whose homes were reduced to ash are likely to return and rebuild, Bell predicts.

"Emotionally they’re overwhelmed. Financially, they’re overwhelmed," he says. "When these fires come through, they don’t just burn houses. They burn stores, restaurants, the churches, the schools. They burn everything. You may rebuild a house, but where’s your infrastructure?"

Lee, the real estate agent whose Orange County home burned down, doesn't plan to rebuild. He and his wife plan to move to Kentucky, TN, or North Carolina, where they have friends who might be able to find him work.

"I’ve started an insurance claim and hopefully I’ll do well. ... [But] I'm a real estate agent and there's nothing to sell anymore," he says. "I'm starting over from scratch at 63 with achy joints and an achy back."

Even homeowners with insurance premiums may not get enough money to rebuild their entire homes to what they were before, Bell says. That's because the price of construction is likely to skyrocket with the extra demand for construction workers, for which there is currently a national shortage compounded by Hurricanes Harvey and Irma, and building materials. Some will get loans, others will tap into their savings.

Those who do rebuild are in for the long haul. The area is expected to recover only about 10% to 15% each year, according to Bell. That means it's likely to take five to 10 years before homes, businesses (including employment and tourism), and the local infrastructure is back to normal.

Plus, they'll have to find a place to live while they rebuild—which won't be an easy feat.

"We had a housing crisis before the fire," says Santa Rosa–based Realtor® Daphne Peterson, of Keller Williams Realty. "We're in a very high-cost area. Our vacancy rate was about 1%. Now we've lost about 1,500 to 2,000 homes. We have no place for people to stay."

Homeowners who decide to sell won't have it easy, either. Those whose homes survived should expect the properties to sell at a 10% to 35% discount. That's because it's not as desirable to live near burnt-out houses or with fewer services and businesses nearby.

"People don't buy a house," Bell says. "They buy a neighborhood."

Meanwhile, properties whose homes were charred or destroyed altogether could see discounts as high as 60%, he says. Sellers should expect an army of investors, a combination of home flippers and landlords, to swoop in.

But the price breaks won't last forever. These will likely dissipate after about five years, he says.

"I know that it will all come back," says Sonoma-area Realtor David Kerr, of Terra Firma Global Partners. "People in the North Bay are resilient. They will get through this." But he worries about the farmhands at the vineyards and the other residents or workers who aren't quite so well off. "It's not going to be easy for [everybody]."

 

HOW CALIFORNIA'S WORST WILDFIRE TRANSFORMED ONE NEIGHBORHOOD

The Oakland Hills fire in 1991 was California's deadliest and most destructive, according to CoreLogic. Twenty-five people were killed and about 2,900 structures on 1,600 acres were destroyed in the blaze.

One of the neighborhoods that sustained serious damage was the Upper Rockridge area of Oakland. It had been a middle-class community of Tudors, Craftsmen homes, and California bungalows built in the early part of the 20th century on narrow streets before the disaster.

But after the wildfire, it became an opportunity for many of the residents who stayed, as well new buyers purchasing empty lots, to start over. Most of the rebuilt homes were much larger than their predecessors.

Today, "it's a highly sought-after neighborhood" of homes in the $1 million to $3 million range, says real estate broker Daniel Stea, of the Stea Realty Group in Berkeley, CA. The homes have been built to new fire codes, the streets have been widened, and there's now a fire station up in the hills nearby. "It transformed the area," Stea says.

Bay Area Showing First Signs that Tech Pastures May Be Greener Elsewhere

San Francisco’s role as the center of the American technology industry could be changing. Skyrocketing real estate prices, along with other employment and other demographic trends, are forcing tech companies and workers alike to reconsider the attractions of living in the City by the Bay.

Recent Census data for 2016 shows that several of California’s most tech-friendly cities, including San Francisco, Los Angeles, and San Diego are all showing net out-migration, or more people are leaving the area than coming in. And these aren’t the only U.S. cities losing population. Census data also shows more people leaving Chicago and New York than are arriving. But where are they going? And why?

Whither techies?

The Census data names Seattle, Portland, Phoenix, most of Florida, Austin, and Dallas as cities showing the greatest net in-migration, or more people coming than going, each with a net gain of more than 5,000 people in 2016. Maricopa county, home to the cities of Phoenix and Mesa, added more than 200 people per day in 2016. Seattle gained more than 1,000 new residents every week.

According to Tim Helenthal, President and COO of the national moving company National Van Lines says, “As real estate prices jump in many metro areas, we see a lot of moves away from expensive cities to places with active jobs markets and a more affordable cost of living.”

For tech industry workers, jobs are just part of the equation. “Real estate markets where the cost of living is lower are desirable to tech workers looking to leave San Francisco,” says Helenthal. “We’re seeing movers going to job markets like Seattle and Austin where there are a lot of tech-related jobs, and we also see cities like Phoenix, Denver, Las Vegas, Portland, and St. Paul where the job market isn’t as hot, but have a substantially lower cost of living than San Francisco.”

Silicon Valley’s loss could be these cities’ gain. Lani Rosales, Chief Operating Officer at Austin-based entrepreneurship news site, The American Genius, and sister news outlet, The Real Daily, says, “There’s a lot of uncertainty from fellow media organizations in Silicon Valley about the tech sector there, but here in Austin, we’re optimistic. We still have a lot of larger companies like Oracle coming to town for the lower operating costs along with a healthy and diverse homegrown startup culture. We’re also first in the country for angel investment and fourth for software-related VC investment.”

Real estate costs are a driver

It’s little wonder money is driving tech workers and others out of the Bay Area. In San Francisco, where the median cost of a home has reached the $1.5 million mark, a salary of $105,300 is considered low income for a family of four, according to the Department of Housing and Urban Development. By contrast, the low-income limits for the U.S. as a whole are just $24,000. This puts pressure on workers to negotiate high salaries simply to afford a home, and pressures employers to keep costs low—often by hiring in less-expensive markets.

By contrast, in Seattle—the fastest rising housing market on the West Coast, and another tech hub—the median cost of a home reached $722,000 in July. Home prices on Seattle’s Eastside—where many tech companies, including Microsoft, are located—are higher, but still less than half the cost of the Bay Area. In many of the other popular destinations for movers, such as Portland, Phoenix, and Austin, median home prices are lower still: half the cost of Seattle, and a quarter the cost of San Francisco.

Work from anywhere but California

The rising cost of living for tech workers in the Bay Area could be feeding into another trend that’s affecting workers and employers around the globe: the work-from-home revolution.

According to Eddie Knoell, owner of Signature Home Loans, a residential mortgage brokerage in the Phoenix Valley, “We’re seeing a growing trend of IT industry workers who work from home remotely and are still employed by Bay Area companies. They’re moving to Phoenix to get away from the high cost of living in the Bay Area, yet are compensated at a higher rate than their counterparts who are employed by local companies.”

The Bureau of Labor Statistics recently reported that the percentage of workers who work from home or via remote at least some of the time had increased steadily over the last decade. As of 2015, 38 percent of people in managerial occupations, and 35 percent of professionals report working from home some or all of the time. For many of them, this provides flexibility when deciding where to put down roots.

Don’t forget retirees

There’s another factor that could be driving migration patterns: baby boomer retirement. Redfin and National Van Lines have both noted a broader trend of people leaving northern climates for Sun Belt states like Florida, Arizona, and Texas.

Aside from the sunny weather, what do these states have in common? They’re top destinations for retirement-age movers, according to a recent analysis by SmartAsset. After years of delaying retirement plans after their retirement accounts were hammered in the 2008 stock market crash and recession, the long-anticipated wave of baby boomer retirees has finally hit at a pace of about 10,000 a day.

Today’s retirees are seeking places where they can live an active retirement on a budget. They may be approaching 70 years old, but most baby boomers say they feel younger and are more active than their age would suggest. The majority also have less saved than retirement benchmarks advise. Perhaps that’s why there are two California counties bucking the out-migration trend. They’re Riverside and Placer counties: home to Palm Springs and Lake Tahoe, long noted as retiree havens with a lower cost of living than California’s coastal cities. Both showed net in-migration of more than 5,000 people in 2016.

San Francisco has long been seen as a city of opportunity. That’s not likely to change anytime soon. However, rising costs and changing demographics are making other cities more attractive to tech workers, retirees, and others who seek job opportunities and a more reasonable cost of living.