California properties located close to wildfire exposure experienced much slower appreciation than others
Note: Bin He and Kien Trinh, both from CoreLogic’s Science and Analytics team, contributed to this post
California is currently grappling with a home-insurance issue, as numerous companies are either withdrawing from the state or reducing coverage in wildfire-prone areas. In May 2023, State Farm and Allstate announced that they would no longer accept new applications for homeowner insurance in California.
This decision followed AIG’s exit from the Golden State market at the beginning of the year. Additionally, several insurance carriers have ceased issuing policies for homes in specific regions of California. As a result, home insurance rates are increasing as options for coverage diminish.
A History of New Construction in California Within Different Fire Hazard Zones
The California State Fire Marshal classifies land into three Fire Hazard Severity Zones (FHSZ): Moderate, High and Very High. Combining FHSZ data with CoreLogic’s data on new construction offers fresh insights into the location risks of newly built homes in the state.
Figure 1 illustrates the percentage of new homes constructed in each FHSZ. Notably, the share of homes built in the Very High FHSZ has declined over the past 15 years, which could be attributed to the implementation of the California Building Code on Jan. 1, 2008. Building a wildfire-resistant home in California can cost an additional $2,800 to $27,100, as reported by Wildfire Today1. These costs, coupled with homeowner insurance premiums, adds to the financial burden of buying a home in California.
On the other hand, the share of new homes constructed in the Moderate FHSZ has nearly doubled since 2008. However, it is important to note that building homes in Moderate FHSZs does not entirely eliminate wildfire risks.
The LNU Lightning Complex fires, one of the largest in the state’s history, devastated Northern California’s Wine Country in 2020. Figure 2a illustrates the FHSZ of Napa, Solano, Lake, Sonoma and Yolo counties. The Very High FHSZ is marked in red, the High FHSZ in orange and the Moderate FHSZ in yellow. When we overlay the LNU Lighting Complex fire, depicted in blue, onto the FHSZ for those counties, as shown in Figure 2b, it becomes evident that the fires affected not only the Very High and High FHSZs, but also the Moderate FHSZ in the right corner of the map.
Following the Great Recession, home prices in California steadily rose, with an average annual appreciation of 9.4%. However, during the pandemic, several factors led to a significant spike in prices, including social distancing measures, remote work options and an out-migration from large metropolitan areas.
How California’s Largest Wildfires Affected Home Price Changes
To examine the potential property damage from wildfires in California, CoreLogic examined the five largest fires recorded in state history, all of which occurred in 2020 and impacted a total of 19 counties. We assessed the value change of properties one year after the disasters.
The initial theory was that all damage would be repaired one year after the wildfires, so the fair value of the property, measured by CoreLogic’s Total Home Valuex AVM, would not be negatively impacted by property damage. We compared the price change between June 2021 and May 2023 for properties located within the fire perimeters, as well as those outside the fire perimeters in all 19 affected counties.
Figure 3 shows that the price of properties located within a fire perimeter actually declined by 0.64%. In contrast, properties located within one mile from the fire experienced price appreciation of 5.1%, while those situated one to five miles away saw a 7.21% gain. It’s important to note that the average price appreciation for California during the same two-year period is 12.3%. These findings clearly indicate that buyers took past wildfires into careful consideration, which is reflected in housing price movements.
As California’s population continues to grow and residential development expands into higher wildfire hazard areas, an increasing number of properties are more exposed to these catastrophes. Taking a proactive approach to this challenge and addressing its effects on the housing market is essential to promote a healthy and resilient housing ecosystem for homeowners, lenders, insurers and policymakers.