Wildfires, drought can't stop California wine country’s hot real estate market

When Jenny Hess visited her sister in Healdsburg, California, in May 2020 to get out of New York City during the pandemic, she was entranced by the area’s temperate weather, natural beauty and sophisticated food and wine culture.

The attraction endured — even when she had to flee for 12 days due to a raging wildfire behind her sister’s house.

So last October, weeks after the evacuation, Hess bought a 2,000-square-foot, three-bedroom, 3½-bath, fully furnished, renovated Victorian cottage three blocks from downtown Healdsburg for nearly $2.3 million.

Hess had no trouble getting affordable fire insurance, since she’s in the center of town, which is considered to be a lower risk than the surrounding hills. But she now constantly monitors fire activity maps and air quality indexes. She has a bag packed, ready in case she needs to leave. 

In July, after the current drought prompted town officials to restrict water use, she followed the lead of many others and found a tank to hold non-potable water.

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"This is such a lovely place," says Hess, who is opening a restaurant and event space in town. "It’s relatively calm, except when you’re worried about running out of water or having a fire burn down your house." 

Others share her feelings: The appraised value on her house has gone up about $300,000 since she bought it.

Evacuations and water restrictions are no longer freak occurrences in Napa and Sonoma counties. Since the Tubbs Fire in 2017, the area has been besieged with massive wildfires, including a series of five fires in 2020. Smoke from fires burning all around the area has already created a haze at times this summer.

Home sales tend to halt during and immediately after a wildfire event, says Zack Sperow, a real estate agent with More Estates —both because buyers retreat and insurance companies won’t sign on. Then it picks up again after a few weeks.

Home prices in California’s wine country have soared to record highs. Napa’s median price was $900,000 in the second quarter of 2021, up 23% from $695,000 in the second quarter of 2019, while Sonoma’s median price rose 17% to $785,000 during that same period, according to data from the MLS. Sales are particularly strong on the high end: In Napa, 57 homes sold for over $2 million in the second quarter of 2021 compared with 17 in the second quarter of 2019.

"It’s astounding," says Randall Bell, CEO of Landmark Research Group, which analyzes real estate values after cataclysmic events.

Analysts say the market is being driven by the same pandemic demand, rising stock market and low mortgage rates that are fueling rising real estate prices elsewhere in the country. The wildfires just add another element to the equation by exacerbating the shortage of supply, as displaced homeowners seek a place to live. 

There is also a lack of available contractors to build new stock, says Frank Nothaft, chief economist for CoreLogic. The disruption of construction and the rising cost of building materials only adds to the pressure on home prices, he says.

Psychology plays a role as well. 

"So far, people have a short-term memory regarding natural disasters," says Patrick Carlisle, chief market analyst in the San Francisco Bay Area for Compass.

Before the pandemic, prices in Napa and Sonoma were rising, but not as fast as the core counties of Silicon Valley, where the high-tech boom was centered, and the adjacent and much more affordable counties like Alameda, says Carlisle. The pandemic changed those dynamics, with inner-county residents moving to more rural and suburban counties, some of which were then hit by terrible fires, he says.

In the Lake Tahoe basin to the east, also a popular Bay Area resort spot where home prices have soared since the pandemic, smoke from the encroaching Caldor Fire is making the environment toxic and spurring evacuations. "Dramatic weather is impacting everywhere," says Alain-Martin Pierret, a real estate agent with Healdsburg Compass. His clients tell him it is a matter of selecting their poison — whether it’s fires, flooding, hurricanes or drought. The wine country climate and natural beauty, low crime and sophisticated culture are outweighing the seasonal risk and inconvenience of fire evacuations, water shortages and dips in air quality, he says.

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These positive traits are keeping David Spangenberg and Peggy Matsuda around. The couple bought a house in Healdsburg in 2010 for a little over $1 million to be close to Ms. Matsuda’s parents. When her parents died and they decided to sell their house last year, they were surprised to find a huge amount of demand.

"Prices had perked up beyond our wildest dreams," says Spangenberg. The couple had been evacuated twice for fires, with officials banging on their doors telling them to get out. They had their power turned off a number of times as a precaution.

"We said ‘Let’s get out of here. It’s just a matter of time before something dreadful happens,’ " says Matsuda. They sold their house for $2.4 million—more than double what they’d paid.

But instead of leaving the area, they decided to buy another house in the nearby town of Santa Rosa, paying $3.45 million in cash in June 2020 for a four-bedroom, six-bat, 3,500-square-foot Mediterranean in a golf club community considered a lower fire risk. They secured fire insurance for $6,000 a year and bought a whole-house generator for $60,000 to deal with the times when risky fire conditions lead the local utility to cut power.

"We racked our brains for where there’s a better or even equal place to live," says Spangenberg. "We would love to leave. We’ve talked about leaving over and over. But this is just such a great place to live."

Spangenberg and Matsuda have both had long careers in commercial real estate investing. And they think valuations in their neighborhood are still rising, despite the threat of fires. Two homes similar to theirs in their Santa Rosa neighborhood recently sold for around $5 million apiece.

Terry Leanio also decided to stay despite the risks. Her house in Santa Rosa burned down in the 2017 Tubbs Fire, during which Leanio and her late husband Phil had to flee at 1 a.m., with time only to take the cat and some papers, in a harrowing and terrifying drive to a shopping area 45 minutes away.

Instead of selling their lot, which they’d been told was worth about $150,000 at the time, they decided to build a new, slightly bigger, four-bedroom, three-bath 2,400-square-foot house in the same spot, a process that took two years of dealing with contractors and cost about $610,000, which insurance covered.

The couple has had to evacuate three times after their home was finished, staying at their daughter’s house once and hotels twice. After her husband died of a heart attack in March, Leanio, 67, considered selling. She recently had her house appraised for about $1 million.

But she loves her neighbors and she has faith that the house won’t burn again, in part because she believes the California Department of Forestry and Fire Protection has become more proactive in recent years.

"I stay here because I’ve been through so much," she says.

Donald Goodkin made a different decision. The retired physician and his wife Catherine bought property in 2010 for $2.6 million and started a vineyard and a B&B. In September 2020, they sold it for more than twice what they paid.

"We enjoyed it until the fires began," says Goodkin, 76. He says the area is "stunningly beautiful" and life was tranquil, but he no longer felt comfortable there because of the threat of fires. The smoke taint ruined a crop of their grapes, and the recurring electricity brownouts grew tiresome.

The Goodkins have a home in France, and they recently bought a condo in Seattle, which he feels is safer from the effects of climate change. "My experience with human nature is that there’s a tendency to rationalize and ignore the possibility that a calamity could occur to you even when it’s incredibly likely it’s going to happen. My personality isn’t like that," he says.

Insurance has played an increasingly large role in real estate transactions in the area, says Hillary Ryan, a broker with Compass. She knows which areas are likely to raise flags about fire risk, including places that have windy, one-way roads and lots of trees. She directs buyers to fire maps and advises they look at historical patterns of wildfires. Safer areas include valley floors and properties close to vineyards, which mitigate burn.

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Over the past two years, many standard insurers have retreated from California communities susceptible to wildfires, sending homeowners to the pricier "surplus lines" and the California FAIR Plan, the insurer of last resort, which can be many times more expensive. But the California Department of Insurance has started to approve some rate increases and mitigation discounts, which should increase the supply of lower-cost policies, says Janet Ruiz, the director of strategic communication for the Insurance Information Institute.

When Spangenberg and Matsuda were seeking insurance for the house they bought in Santa Rosa in June, they were quoted a range of $20,000 to $42,000 a year by the surplus insurance companies, but they were eventually able to secure standard insurance through a major carrier for $6,000 a year.

Still, brokers say insurers are increasingly limiting how many policies they’ll write for each area, often choosing a few houses on a block to spread out the risk. California Association of Realtors chief economist Jordan Levine said those limitations could change the housing market.

Cindy Johnston says the buyers of her house had no trouble getting affordable fire insurance. 

The 67-year-old nurse, who moved to Sonoma in 2002 to be with her now-husband, put her 3,400-square-foot farmhouse up for sale for $3.875 million this past June. It sold in one day for the full price.

 "The threat of fires didn’t make any difference," she says.