How California’s Wildfire Season Affects Real Estate

California has long dealt with wildfire concerns, and in recent years, it has seen a significant increase in their intensity, especially from 2018 to 2021. Earlier studies suggested that being far from high fire-risk zones had little effect on residential housing values. However, since the late 2010s, this has changed due to considerable fire damage across the state. Additionally, insurance availability provides limited protection for home values in higher-risk areas. This situation highlights the need to address wildfire risks in the real estate market proactively. Adapting to these challenges, homeowners can build resilience and stabilize property values. 

Wildfires in California are becoming more frequent, but proactive measures can help mitigate their impact on real estate. Homeowners and investors can safeguard their assets by focusing on fire-resistant construction and strategic planning. By staying prepared and focusing on areas with wildfire prevention strategies, the real estate market can remain stable.  

Wildfire Risk and Housing Values 

The growing intensity of wildfires and the increasing exposure of high-risk areas significantly impact California’s real estate market. To explore this, wildfire data from the Monitoring Trends in Burn Severity (MTBS) database was analyzed, focusing on fires larger than 1,000 acres. This data tracks burn areas and fire dates, providing valuable insights into past wildfire activity. The study centers on single-family, owner-occupied homes using annual data at the zip code level. 

To measure wildfire risk, the five nearest wildfires to each zip code are identified annually, and the average distance from the zip code’s geographic center to the burn areas is calculated. This method estimates how past wildfires influence home values. 

The relationship between proximity to past wildfires and real estate prices is then analyzed, controlling for factors such as property size, building square footage, and amenities. To ensure accurate comparisons, trends within the same zip code are examined rather than across different areas. Zip codes within 3 miles of fire perimeters are excluded to avoid skewed data from destroyed homes. Finally, the focus is on the impact of fires from the past three years, as this period best reflects how wildfires affect property values over time. 

How Do California Wildfires Affect the Rental Market? 

Wildfires affect not only homeowners but also renters. In heavily impacted areas, rental demand often temporarily rises as displaced homeowners seek temporary housing. This surge can lead to higher rental prices, making it more costly for renters in the short term. 

Over the long term, the effects can differ. Wildfire damage might reduce the number of available rental properties, further driving up prices. Conversely, if an area is perceived as too risky, demand may decline, leading to lower rental prices. Additionally, property owners in high-risk regions may experience increased insurance premiums, which they might pass on to residents, further influencing the rental market. 

Does Insurance Help Home Values? 

Analysis reveals that wildfire risk can lower home values, leading to an investigation into whether homeowners can mitigate this risk with insurance. Homeowners can obtain coverage through the private market or the California FAIR plan, designed for those who struggle to find private insurance. However, the FAIR plan is typically more expensive and offers limited coverage, focusing only on the home, unlike private insurance, which often includes personal belongings and additional benefits. In 2021, the FAIR plan accounted for just 3% of the residential insurance market but is more common in high-risk wildfire areas like mountainous or forested regions. 

By analyzing data from the California Department of Insurance (CDI), insurance coverage was estimated in two ways: the percentage of homes with insurance and the usage of the FAIR plan, which also reflects coverage quality. Although the data do not explicitly label FAIR plans, “dwelling only” policies provide a strong indication. After considering insurance access and wildfire risk classification, it was found that these factors do not significantly mitigate the negative impact of being near fire zones on home values. 

Conclusion 

As California’s population grows and more homes are built in areas prone to wildfires, many properties are facing greater risk. Addressing this issue early on is essential to maintaining a strong and stable housing market that benefits homeowners, lenders, insurers, and policymakers. While areas prone to wildfires offer beautiful landscapes and green spaces, the growing risks outweigh the benefits, even with insurance coverage.  

For any further queries on property management, you can contact us at Beach Front Property Management.