California: The Effects of Wildfires, Earthquakes, and Regulations on California’s Housing Market

California is a state of contrasts, with diverse landscapes, cultures, and economies. It is also a state of challenges, facing frequent natural disasters and complex regulatory issues that affect its housing market. In this article, we will explore how wildfires, earthquakes, and regulations have impacted California’s housing market in recent years, and what trends and forecasts are expected for 2023.

Wildfires: A Growing Threat to Homes and Communities

California has experienced some of the most devastating wildfires in its history in the past decade, with record-breaking fires in 2017, 2018, and 2020. According to the California Department of Forestry and Fire Protection (CAL FIRE), wildfires burned over 4.2 million acres of land, destroyed over 10,000 structures, and killed 33 people in 2020 alone. The economic losses from the 2020 fire season are estimated to be between $10 billion and $13 billion.

Wildfires have a direct and indirect impact on California’s housing market, affecting both supply and demand. On the supply side, wildfires reduce the available housing stock, especially in rural and suburban areas that are more prone to fire risk. According to a study by Zillow, more than 1.5 million homes in California are at high or very high risk of wildfire damage, representing 15% of the state’s housing units. These homes have a combined value of $268 billion, which is 17% of the state’s total housing value. Wildfires also increase the cost of construction and insurance for homeowners and developers, making it more difficult and expensive to build or rebuild homes in fire-prone areas. According to the California Department of Insurance, the average annual premium for homeowners insurance in California increased by 69% from 2015 to 2019, from $922 to $1,556. Some insurers have also stopped offering or renewing policies in high-risk areas, leaving homeowners with fewer options or higher prices.

On the demand side, wildfires affect the preferences and behavior of homebuyers and renters, who may seek to relocate to safer or more affordable areas. According to a survey by Redfin, 49% of Californians said they would consider moving out of state because of natural disasters such as wildfires. The survey also found that 76% of Californians said they were concerned about the impact of natural disasters on their home value, compared to 65% nationally. Wildfires can also create a temporary surge in demand for housing in nearby areas that are less affected by the fires, as displaced residents look for short-term or long-term alternatives. For example, after the Camp Fire in 2018, which destroyed most of the town of Paradise, the median home price in Chico, a neighboring city, increased by 21% in one year, from $326,000 in November 2018 to $395,000 in November 2019.

The effects of wildfires on California’s housing market are likely to persist and intensify in the future, as climate change increases the frequency and severity of fire seasons. According to a report by the Union of Concerned Scientists, the number of homes exposed to high or extreme wildfire risk in California could increase by 20% by 2050, from 1.2 million to 1.4 million. The report also projected that the annual area burned by wildfires in California could increase by 77% by 2100 under a high-emissions scenario. These projections imply that wildfires will continue to pose a significant threat to California’s housing market, and that more proactive and adaptive measures are needed to mitigate the risk and enhance the resilience of homes and communities.

Earthquakes: A Looming Danger for Homes and Infrastructure

California is also known for its seismic activity, as it lies along the boundary of two tectonic plates: the Pacific Plate and the North American Plate. The movement of these plates causes frequent earthquakes, some of which can be very destructive. According to the U.S. Geological Survey (USGS), California has experienced more than 30,000 earthquakes since 1900, with an average of about three earthquakes per day. The most recent major earthquake in California was the Ridgecrest earthquake in 2019, which had a magnitude of 7.1 and caused more than $5 billion in damages.

Earthquakes have a direct and indirect impact on California’s housing market, affecting both supply and demand. On the supply side, earthquakes damage or destroy existing housing units, reducing the available housing stock and increasing the cost of repairs and reconstruction. According to a study by CoreLogic, a major earthquake in California could damage or destroy up to 3.5 million homes, with a total reconstruction cost value of $289 billion. Earthquakes also increase the cost of construction and insurance for homeowners and developers, making it more difficult and expensive to build or rebuild homes in earthquake-prone areas. According to the California Earthquake Authority (CEA), only about 13% of California homeowners have earthquake insurance, which means that most homeowners would have to bear the financial burden of repairing or replacing their homes after an earthquake.

On the demand side, earthquakes affect the preferences and behavior of homebuyers and renters, who may seek to relocate to safer or more affordable areas. According to a survey by Realtor.com, 25% of Californians said they would consider moving out of state because of natural disasters such as earthquakes. The survey also found that 71% of Californians said they were concerned about the impact of natural disasters on their home value, compared to 65% nationally. Earthquakes can also create a temporary surge in demand for housing in nearby areas that are less affected by the earthquakes, as displaced residents look for short-term or long-term alternatives. For example, after the Northridge earthquake in 1994, which damaged or destroyed more than 40,000 housing units in Los Angeles County, the median home price in Ventura County, a neighboring county, increased by 12% in one year, from $195,000 in January 1994 to $218,000 in January 1995.

The effects of earthquakes on California’s housing market are likely to persist and intensify in the future, as seismic hazards remain high and unpredictable in California. According to the USGS, there is a 72% chance of a magnitude 6.7 or greater earthquake occurring in the San Francisco Bay Area before 2043, and a 59% chance of a similar earthquake occurring in the Los Angeles area before 2033. These projections imply that earthquakes will continue to pose a significant threat to California’s housing market, and that more proactive and adaptive measures are needed to mitigate the risk and enhance the resilience of homes and infrastructure.

Regulations: A Balancing Act between Protection and Production

California is also known for its strict and complex regulations that affect its housing market, such as environmental, zoning, and building codes. These regulations are intended to protect the public health, safety, and welfare of Californians, as well as to preserve the natural resources and beauty of the state. However, these regulations also have unintended consequences that affect the supply and demand of housing in California.

On the supply side, regulations increase the cost and time of housing production, making it more difficult and expensive to build new homes or remodel existing ones. According to a report by the California Department of Housing and Community Development (HCD), regulatory barriers can add up to 18% to the cost of building a single-family home, and up to 30% to the cost of building a multifamily home. These barriers include fees, permits, reviews, inspections, standards, restrictions, and litigation. The report also estimated that it takes an average of four years to complete a housing development project in California, compared to two years in other states. These factors contribute to the chronic housing shortage in California, which has an estimated gap of 3.5 million homes between projected need and supply by 2025.

On the demand side, regulations affect the preferences and behavior of homebuyers and renters, who may seek to benefit from or avoid certain regulations. For example, some regulations may create incentives for homeownership, such as the mortgage interest deduction or the Proposition 13 property tax cap. These regulations may increase the demand for homeownership, especially among higher-income households who can afford to buy homes and take advantage of the tax benefits. Other regulations may create disincentives for homeownership, such as rent control or inclusionary zoning. These regulations may reduce the demand for homeownership, especially among lower-income households who can benefit from lower rents or subsidized units. These regulations may also affect the mobility and affordability of housing in California, as they may create distortions in the allocation and distribution of housing resources.

The effects of regulations on California’s housing market are likely to persist and change in the future, as new regulations are enacted or modified in response to changing needs and challenges. For example, in 2020, California passed several bills that aim to increase housing production and affordability, such as AB 3088 (Tenant Protection Act), SB 330 (Housing Crisis Act), AB 68 (Accessory Dwelling Units), and AB 1482 (Rent Cap). These bills are expected to have various impacts on California’s housing market in 2023 and beyond.

Conclusion

California’s housing market is influenced by many factors, but three of the most prominent ones are wildfires, earthquakes, and regulations. These factors have direct and indirect effects on both supply and demand of housing in California, creating challenges and opportunities for homeowners, renters, developers, policymakers, and researchers. As California faces more frequent and severe natural disasters and more complex and dynamic regulatory issues in the future, it is important to understand how these factors affect its housing market, and how to address them effectively and efficiently.

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