Coldwell Banker agent Tim Allen was in a hot tub in Vail when news of a possible pandemic first hit in 2020. Within days, he had hopped a flight back home to Carmel, California, where he immediately began doing triage on his luxury deals that were in danger of falling out of contract as the world began shutting down around him.
On one deal, he was representing both sides of a $7.5 million sale that was already in escrow. Other buyers were playing hardball with sellers or walking away from deals entirely, unsure about what lay ahead. But the buyers for this oceanfront property were a family who had owned a chocolate company for generations and considered the purchase to be another generational hold.
The deal went through, and Allen estimates the property’s value has more than doubled in less than five years as the Bay Area’s drive-to second-home markets skyrocketed during the pandemic.
“This is when everyone was panicking, and obviously it was a very good move,” he said.
After those initial “scary” weeks of the shutdown, Allen said, his phone began ringing again, and soon after “it started ringing off the hook.” Following the first wave of 2020 buyers seeking immediate escape from California’s shut-down cities came the second, even larger wave in late 2021 of those who realized “Covid had fundamentally changed people’s lifestyles and what their goals in life were,” he said.
Though the frenzy has died down, Monterey’s luxury markets are still well above where they were in 2019, according to Allen, with the lack of inventory keeping values from sinking too far.
Agents and developers in other top Bay Area second-home markets said they saw the same trajectories: a quick spike in sales starting in the summer of 2020, followed by more sustained demand driven by a combination of remote work, a roaring stock market and low interest rates that pushed these vacation destinations to new heights.
In 2023, offices began opening back up, interest rates spiked and insurance concerns worsened, leading to today’s more balanced “new normal,” where inventory is still low but buyers no longer have to take any property that comes along or pay any price.
“It’s different than it was,” Allen said. “Sellers that are overreaching are not getting their price, and it’s hurting them.”
The pinch
Ohana Realty’s 260-acre Montage Residences Healdsburg development in Sonoma had been in the works for more than a decade, so President Soren Olsen said the firm just got lucky that the project came to market exactly as city dwellers developed a fervent passion for the country life.
“You can’t control a global pandemic, but we were set up in a position to be able to take advantage of it and provide an offering people were interested in,” she said, adding that the company has sold through 70 percent of its built product.
Sales began in 2020 and immediately took off, both for ready-built homes and buildable lots in the luxury community, which increased its prices in tandem with demand.
Harvest Homes — four-bedroom, two-story single-families — started around $5 million for homes on limited view lots, and peaked at over $7 million for a home on a lot with a great view, said Seth Cotter, who led sales for the development. Absorption for sales and contracts peaked in 2021, with the appetite for land in particular dissipating as construction costs increased along with interest rates.
“Covid had fundamentally changed people’s lifestyles and what their goals in life were.”
It’s not the interest rates themselves that had an impact on the development’s buyers, who can largely pay in cash. Rather, interest rates led to concerns about the broader economy, Olsen said.
“If San Francisco and the Bay Area are having a moment where there is economic turmoil, or the housing market is shaky, that’s going to spill over into any of these second-home markets,” said Olsen. “We were lucky to have been able to time our market where we sold through the majority of our product in a boom, so we haven’t had to deal with the fallout.”
The other impact of interest rate hikes is that they incentivize current owners to stay in their homes, rather than selling, because they don’t want to give up their historically low rates. That has kept inventory low even as buyer demand has diminished since the pandemic highs.
In Napa Valley, the 2019 median sale price was $691,000 and there were about 1,300 sales, which represents a pretty typical level of annual transactions historically, said St. Helena-based Coldwell Banker agent Cyd Greer. In 2020, there were almost 1,500 sales, and by 2021 the number hit nearly 1,700, even with a median price by then of $835,000. By 2022, the median was up to $925,000, but the number of transactions was back to about 1,250. In 2023, the median price dipped slightly, but transactions plummeted to 900.
There are two main interest-rate-related issues impacting those transaction figures from the seller side, Greer said.
“‘Why would I sell? I’m going to have to take on a mortgage that’s double what I’m paying now,’ and then also, ‘What am I going to buy?’” which only further fuels the lack of inventory, she said. “It creates a whole world of property owners reluctant to sell.”
Firewise
Economic uncertainty over interest rates has also impacted sales on the Monterey Peninsula, Allen said, but what has affected the market even more are rising insurance costs and the lack of insurance options outside of the California FAIR Plan, the state’s insurance plan of last resort.
Even with minimal coverage at a maximum price, the plan has seen enrollment jump over the past few years as traditional insurers pull out of the state. Since 2019, FAIR Plan home policy premiums have increased by 164 percent and commercial policies have increased by 140 percent, according to state figures.
But FAIR has a $3 million residential cap, so it won’t cover a luxury rebuild in Carmel, which is in several fire zones, said Allen, causing many high-net-worth owners to “take the risk” and self-insure.
Near Lake Tahoe, where the Caldor Fire burned down more than 1,000 structures over 69 days in 2022, if homes have a shake roof or even just an older roof, there’s a good chance the buyer won’t be able to get it insured, said Sally Gardner of Compass’ Tahoe Estates Group. Insurance issues can lengthen a closing, but they don’t usually end up killing the sale, she added, with many people forced to go with the FAIR plan.
Insurance around the lake is “definitely tricky,” said Brian Hull, president at Martis Camp Realty, and sometimes the agency is called upon to help connect luxury buyers with insurance options. Martis Camp, a golf development on nearly 2,200 acres near Truckee and Northstar Ski Resort in North Lake Tahoe, is a registered “firewise community,” he said. That means it has been strengthened for added fire resilience, and that makes the job of finding an insurer a little easier while also giving buyers some peace of mind.
In Sonoma, Ohana donated land on its property to the city of Healdsburg to build a fire station, which could help reassure both insurance companies and homeowners. But at this point, said Ohana’s Olsen, there is nowhere in the state that is immune from fire risk, especially in more rural second-home markets. Her buyers, who are more than 50 percent in-state, generally understand that.
“It’s kind of becoming something that, for better or worse, they’re used to,” she said.
Post-pandemic pickiness
Buyers might be able to handle the fire risk, but they don’t want to build or remodel a home if they don’t have to. Even with limited inventory in the Bay Area’s second-home markets, buyers are not moving ahead with pandemic-era gusto for just any old property, and raw land and fixer-uppers have been the most dinged by the drop in demand.
The “Covid effect” meant that buyers “were urgent in their search for a home, and it precipitated spikes in property values as a result,” said Gardner. Compare that to today, when lot sales around the lake have slowed and DIYers can find real deals.
“There are some value properties on the market that they can pick up if they’re willing to do some work, because a lot of people aren’t,” she said.
“You can’t control a global pandemic, but we were set up in a position to be able to take advantage of it and provide an offering people were interested in.”
In Martis Camp, one of the things Hull remembers most from the “great whiplash” that came just after the pandemic shutdown was how quickly lot sales were taking place. In 2021 alone, the community sold 60 homes and nearly as many lots, even though it would be years before buyers could have a finished product.
“To see that kind of market exuberance was shocking,” he said.
Some of those Covid-era lot buyers are now selling and have bought existing homes in the community instead, telling Hull, “‘We intended to build, but we really want it now.’”
A new outlook
A YOLO attitude is one reason that second-home demand hasn’t dropped further, and may in fact may be one of the most sustained after-effects of the pandemic, Hull said.
Before Covid, buyers were in no rush to make a decision on what is a highly discretionary purchase. They’d hold off on buying, worrying that the timing wasn’t quite right. Then came the frantic speed-purchasing of the pandemic.
More recently, Hull said, sales have slowed, but “the willingness to make a decision seems not to have waned, and I think that overarching ‘Hey, we want to enjoy this now and life is short’ is as strong as it’s ever been.”
His data shows an average of 45 days on market in Martis Camp at peak Covid “hysteria,” and though that’s now up to about 90 days, pre-pandemic it was 150 days. The increased transaction rate has come even with a price per square foot of between $1,700 and $1,800, whereas pre-Covid it was $1,200.
Second homes are all about usage, Hull said, and the continued changes brought on by the pandemic have allowed people to use these getaways far more regularly than they used to, even with school schedules, kids sports leagues and return-to-office policies bringing people back to their primary homes more often.
He said a recent survey of his buyers surprised even the sales team, which had been expecting more of the typical mid- to late 50s, near-retirement demographic and instead found that the average buyer was in their late 40s, with children still at home.
“People recognize ‘The kids are only small for so long, and life is short. Assuming we love it, let’s be part of it now,’” he said.
That’s one reason Tahoe’s increased restrictions on short-term rentals haven’t been a big constraint on the market, Gardner said: Many buyers are interested in using the homes themselves, not renting them out.
There’s a big difference between a vacation home and a true second home, said Allen, especially in luxury Bay Area markets where affluent buyers may own four or five different properties. More of his buyers have been using their second homes for longer periods as a result of a pandemic-spurred wave of introspection.
“People started rethinking their lifestyles,” he said. “Should they work all the time? Should they be in the pressure of Silicon Valley or could they retire sooner, or work remotely from places that are more beautiful and less stressful?”