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How A Blistering Housing Market Could Be Making Wildfires Even More Dangerous

Lake Tahoe, CA. September 2, 2021: Firefighters battle the Caldor fire along highway 89 west of Lake Tahoe Thursday.
Lake Tahoe, CA. September 2, 2021: Firefighters battle the Caldor fire along highway 89 west of Lake Tahoe Thursday.

Plumes of smoke waft through California. Popular vacation spots have become evacuation zones. Neighborhoods are burning to the ground. As the climate changes and rainy days become even fewer and further between, the state is being forced to reckon with a demonic new season sandwiched between summer and fall: fire season, the time of year you wear an N95 mask for reasons other than just a pandemic, and the smoky skies can make it feel like Armageddon.

Yet even in the areas at the highest risk for wildfires, property values seem almost impervious to the fiery destruction. Despite battling catastrophic annual fires, Napa County has seen its median home price rise almost 42% over the last five years, according to data from real estate company Redfin. Sonoma County, another high-risk area for wildfires, has seen its median home price rise more than 40%. And, nestled next to Lake Tahoe, El Dorado County, which has battled the Caldor Fire in recent weeks, has seen its median home price rise almost 60% over the last five years.

Despite fires, the demand for housing in California still dwarfs the supply

Climbing home prices in fire-prone areas may seem strange. There are, after all, many reasons why wildfires should lower property values — the risk of houses burning down, smoke poisoning the air for weeks at a time, charred scenery, skyrocketing home insurance premiums. Studies find fires have a history of reducing an area's housing demand and its property values, especially for homes with ruined views that remind residents of future dangers.

But with its job opportunities, temperate climate and outdoor amenities, Northern California remains desirable, and the supply of homes remains scarce. Housing is so scarce that even if a regular fire season decreases housing demand, an army of eager homebuyers is waiting to snatch up what they consider to be a deal.

"There aren't enough houses for everybody who wants to buy them, especially in places like coastal California," says Daryl Fairweather, chief economist of Redfin. "That pushes people to buy inland in more fire-prone areas, even if that fire risk is increasing."

[Editor's note: This is an excerpt of Planet Money's newsletter. You can sign up here.]

A recent report from a team of researchers at the University of California, Berkeley and Next 10, a nonprofit think tank, analyzed the growing fire crisis in the state. It argued that anti-development regulations in safer, urban zones made housing prohibitively expensive, incentivizing urban sprawl into forested and grassy areas prone to wildfire. Robert Olshansky, a co-author of the report, says that homebuilders find it much easier to build in the wildland-urban interface, the zone most at risk for wildfires. The report says that, between 1990 and 2010, half of all new houses in California were built in that zone. "It's not just a fire problem," Olshansky says. "It's part of the state's housing crisis."

Wildfires, meanwhile, are only making California's housing crisis worse. In a recent analysis, Selma Hepp, deputy chief economist of the real estate analytics company CoreLogic, looked at housing values and rents in the wake of wildfires in Northern California. She found that when fires were particularly destructive to an area's housing supply, prices rose significantly in the aftermath.

For example, Santa Rosa, the biggest city in Sonoma County, saw around 6% of its housing stock destroyed in the 2017 Tubbs Fire. That 6% of households needed to live somewhere — and many returned to their hometown. Hepp found that the annual growth rate of rents tripled in Santa Rosa in the months after the fire, up from 4% before the blaze. Likewise, annual home price growth in Santa Rosa jumped to 12% from 7%. Sonoma County overall saw both rent and home price growth double. Price trends have since cooled, and Hepp doesn't find the same price-increasing effects for fires that occurred in 2020. One reason, she says, was 2020 fires didn't destroy as many homes.

The ripple effects of fires have been felt in property markets beyond those directly affected. Another UC Berkeley study last year found evidence that, between 2009 and 2019, housing demand grew in Berkeley in response to Northern California fires. The author concluded that "frequent and large-scale California wildfires generally increase Berkeley's home prices."

Insurance markets are buckling under the weight of climate change

Another important reason property values are still growing in regions prone to fires is the ability of homebuyers to obtain fire insurance. For a long time, the economics of traditional commercial home insurance worked in places such as California. Between 1964 and 1990, the insurance industry paid, on average, less than $100 million a year to cover wildfire losses nationally. However, in recent years, the insurance market has been in turmoil as it grapples with the costs of much more destructive fire seasons. Between 2011 and 2018, the insurance industry paid an average of $4 billion a year to cover national wildfire losses. In 2017 and 2018, however, California alone filed more than $20 billion in insurance claims to cover wildfire losses, obliterating decades of the industry's profits from providing home insurance in the state. Pacific Gas & Electric reached settlements to cover a good chunk of the losses from those fire seasons. Nonetheless, it's been a bad time to be in the business of selling home insurance in California.

California has a highly regulated home insurance market, where rates must be approved by the state. The growing effects of climate change have set the stage for a political battle over who should pay for the mounting costs of destruction. In response to crippling insurance claims, insurers have been fighting to jack up rates and lower payouts. And they have been increasingly deciding not to renew home insurance policies for Californians in fire-prone areas. Between 2015 and 2019, insurers refused to renew home insurance policies for almost 1 million Californians.

The California Department of Insurance, under Commissioner Ricardo Lara, has been using stopgap measures to protect homeowners in fire-stricken areas. For three consecutive years, Lara has issued yearlong moratoriums on insurance nonrenewals in hard-hit areas, forcing insurers to continue covering homeowners who would otherwise likely be dropped. That has invigorated the political debate over who should bear the costs of climate change. Should it be private insurance companies, which are facing the near-impossible economics of insuring historic catastrophes every year? Should it be the government? Are things getting so bad that whole chunks of California should be build-and-live-at-your-own-risk zones? About a quarter of Californians — 11 million people — now live in high-risk fire zones. Removing insurance from the equation would likely devastate communities and force millions to relocate.

As the traditional insurance system attempts to exit high-risk areas, homeowners have been forced to turn to the high-cost and barebones California FAIR Plan as a last-ditch effort to insure their homes. The FAIR Plan is a state-mandated insurer of last resort, funded by insurance companies and policyholders themselves, for high-risk homeowners who can't find coverage in the traditional marketplace. It's supposed to be an emergency policy, but, as of 2019, almost 200,000 Californians relied on it.

Commissioner Lara and Gov. Gavin Newsom have also been working on other measures to incentivize fire mitigation strategies, such as home "hardening," aimed at making homes more resilient to fire. However, many homeowners can't afford to harden their homes. There's been a political fight to provide government funding for such mitigation strategies and to get insurers to offer policy rate discounts to homeowners who make investments to protect their homes against fires.

Lara recently formed the Climate Insurance Working Group, which is trying to chart a path for the state to cope with future devastation from climate change. "The clearest path to reducing future losses — which also leads to lower insurance costs — is building better," the group's draft report says. "For too long, development has moved more people and homes into areas at higher risks in the absence of strong building and zoning codes and accurate hazard mapping; this will not solve the state's long-term affordable and equitable housing challenges."

Even if you're not a Californian, it may be worth paying attention to how this all shakes out. Whether it's fires or floods or hurricanes or rising sea levels, climate change is poised to wreak havoc on property and insurance markets throughout the nation.

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