As wildfires are still burning in California, what will happen to California real estate investors?
For all its natural beauty, California is prone to natural disasters.
In 2018, The Golden State has seen the most destructive wildfire season on record. Since mid-July to this day, a series of large wildfires erupted across California, including the tragic Carr Fire, Mendocino Complex Fire, Woolsey Fire, and Camp Fire. According to the California Department of Forestry and Fire Protection (Cal Fire), the wildfires burned a total of 1,665,746 acres – the largest amount of burned acreage recorded in a fire season.
As you can expect, the California wildfires caused massive damage affecting residents, homes, and businesses across multiple counties. In addition to countless other effects, this has become a concern for California real estate investors. There’s no doubt that the fires will significantly affect the California housing market. How though? According to Michael Tachovsky, an expert in real estate damage economics at Forbes:
“Every wildfire is unique and so is its impact on individual properties. Properties may be completely burned, partially burned or not burned at all. These damages impact society on an individual level, but there is also an impact on society as a whole. Wildfires have the ability to change the makeup of a community and alter marketplaces.”
What does this mean for California real estate investors? Are home prices going up or down? Is buying an investment property in California a good decision? Seeing as the wildfires are continuing to burn, it is too early to predict what the California housing market will look like once they’re finally put out. However, we can make a few predictions based on thorough research and market trends.
Home Prices and Property Values
Usually, after similar major disasters, real estate prices tend to drop in the affected area. Even properties untouched by the fire will see a decrease in their value. Why? People choose houses for both the amenities and the neighborhood. Wildfires don’t only destroy residential properties, but also the community’s infrastructure and, thus, reduces the quality of life there.
No one wants to look out their windows to see the remains of their neighbors’ homes. Additionally, neighborhoods might become loud with construction zones as people try to rebuild their communities. Not to mention there is always the fear that another fire could strike. All of these factors make it less appealing to live in the affected area and, thus, property values will drop.
This is a good time for California real estate investors looking to fix and flip houses to swoop in the housing market. Those looking to sell their investment properties that have survived, however, can expect a decline in selling price. Still, this dip in prices will not last forever. Typically, real estate prices are affected only in the immediate aftermath of a wildfire and rebound within 2 -5 years after the area is improved.
On the other hand, prices have shot up for homes and rental properties in areas in California that were untouched by the wildfire’s fury. The limited housing supply combined with the added demand of people looking for new places to live is driving up prices. Seeing as the California housing market is already pricey, many people turn to rental properties until they figure out their next move. Thus, California real estate investors who own rental properties can expect to see a shift to multifamily homes and increasing rental rates.
People Leaving the California Housing Market
The decision that Californians who are affected by the wildfires will need to make is whether to stay and rebuild or move out of the state and start fresh. California is already seeing a growing migration, mainly due to the high cost of housing. The wildfires could end up becoming another contributing factor to this trend. California real estate investors should see this as a sign to consider investing out of state.
Camp Fire (California’s most destructive wildfire on record) completely wiped out the town of Paradise, burned 153,336 acres, and destroyed 18,733 buildings. At the same time, the Woolsey Fire burned 96,949 acres, threatening both Thousand Oaks and Malibu, in addition to destroying 1,500 buildings. According to The New York Times, these two fires forced 81,000 people to evacuate and leave their homes.
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Is Rebuilding a Good Decision?
Nonetheless, many who were evacuated or have lost their homes still want to stay in the area and are willing to pay whatever is necessary to do so. This is where the real issue lies. Property buyers want to live in areas that are prone to wildfires despite their awareness of fire risks. Their decision to rebuild is pushing the demand for developments of single-family homes and, as a result, prices have shot up in these affected areas where residents decided to stay.
Should California real estate investors whose investment properties were burned consider rebuilding too? There are a couple of things you should know before making this decision. First, insurance rates in areas affected by wildfires are going to shoot up due to the demand for housing. So, insurance payouts will probably not cover the costs of rebuilding. Second, lawmakers in California will possibly face pressure to update building codes to make housing better able to survive fires.
As a result, if you want to rebuild, you should expect the reconstruction costs to rise even more, which would make it financially out of reach. In fact, according to estimates from CoreLogic, rebuilding high-risk homes (properties that the fire is more likely to damage) in the California housing market will require roughly $8.6 billion in total reconstruction costs after the wildfires.
Because of this, many simply can’t afford to rebuild and have no option but to relocate. This could mean that there will be a surge of people buying or renting in other parts of California or starting fresh in another state, which goes back to why California real estate investors should consider investing out of state.
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What’s the Next Step for California Real Estate Investors?
One thing is for sure: once the fires are put out, the loss of housing and properties will transform the housing market. Only time will tell how these changes will affect California real estate investors, but as long as people still have the desire to live in the region, developers will continue to build in high-risk areas. This could present new opportunities for investors looking to capitalize in California. While recovering from a wildfire is definitely not easy, it’s helpful for investors to stay aware of what this tragic event could lead to in the future in order to make the best investment decisions.
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