The Outlook for Property Values in Montecito

For most residents of Montecito, a large portion of their investment portfolio and net worth is tied up in the value of their home. What will be the long- and short-term impact of the twin tragedies of the Thomas Fire – the largest in California history – and the destructive 1/9 debris flow on real estate values and home prices in Montecito?

These questions were put to a panel of local real estate professionals that include Dan Encell at Berkshire Hathaway; Harry Kolb at Sotheby’s; Suzanne Perkins at Sotheby’s; Dinah Landi at Riskin Partners/ Village Properties; Crystal Clark and Nigel Copley at Berkshire Hathaway; Wendy Gragg at Distinctive Real Estate; and Michael Phillips at Coldwell Banker. 

Current Home Values 

The median value of a home in Montecito is currently $3,380,800, according to the Zillow Home Value Index. The median price per square foot in Montecito has risen to $1,231, considerably higher than the $495 for the entire county.

There is a consensus among the realtors that the sale of more expensive homes in Montecito was already experiencing a slowdown prior to the fire and debris flow. Dan Encell points out that “high-end home values in Montecito real estate were poised to take an additional hit with the passage of the 2017 Tax Act, which limits the federal deduction for state income taxes, property taxes, and sales taxes to $10,000 (SALT), and lowers the cap on mortgage interest deduction (MID). These changes make the cost of owning a home in Montecito higher.”

Encell adds, however, “With as many as five hundred homes destroyed or damaged, we will see a 10 to 15 percent reduction in home supply in Montecito. Those same five-hundred displaced households will need places to live, either temporarily or permanently, within Montecito or elsewhere.” Harry Kolb notes too that “With all due respect to those who suffered significant loss, ninety percent of Montecito homes remain undamaged.” 

Assessed Valuations

Theo Fallati, County of Santa Barbara auditor-controller, projected property tax collections in Montecito for 2017-18 at $104.5 million. This suggests a collective assessed property valuation in excess of $10 billion for Montecito real estate, an all-time high. Even that $10 billion in assessed value for homes and businesses in Montecito, is well short of either market value or replacement value.

Montecito, with only 3% of the parcels in the county (4,322 out of 145,796) generates 13% of the county’s property tax revenue ($104.5 million out of the $797 million in county property taxes). The average tax parcel in Montecito generates $24,172 in annual property taxes, compared to an average contribution of $5,464 per parcel for the entire county. 

Santa Barbara County is concerned that at least 400 Montecito homeowners with destroyed or damaged homes will petition the assessor’s office for lower property tax assessments. This would result in a considerable hit to county coffers. It is in the best interest of the county to see that all property values in Montecito are restored as quickly as possible.

Uncertainty: Real Estate’s Worst Enemy

Dan Encell warns: “It is difficult to sell real estate whenever there is uncertainty.” The list of uncertainties includes the overhanging risk of future rains and debris flows; the risk of the future insurability of homes in Montecito; the risk of availability and cost of water in the event of a prolonged drought; the risk of major traffic congestion discouraging buyers affected by construction dirt, noise, and parking problems, and possible new restrictions in land use and permitting policies in the red zone. 

Risk #1. Possibility of Another Catastrophic Event 

Every homeowner in Montecito isdeeply concernedover the future risk of a mud and debris flow, fire, or earthquake that could dislodge the boulders above Montecito. Rob Lewin, director, County Office of Emergency Management says: “Let us not be fooled that the 1/9 storm has flushed the debris from the mountains. To the contrary, the canyons are still loaded with rocks, sediment, and other debris.”

Montecito has recently been segmented into three risk categories – all bad: 

1) Extreme risk near a creek or channel (the Red Zone). These properties are at extreme risk of debris flows from water overtopping stream banks, creating high-velocity debris flows of rocks, mud, and water that cause destruction. 

2) High risk between creeks and channels (the Yellow Zone). These properties are at high risk as creeks and channels may leave their regular courses, impact properties and roads, and isolate residents for multiple days or longer. Roads may become impassable and deadly. Utilities may become disrupted or destroyed. 

3) High-risk burn area (the Grey Zone). These properties are at risk from mudslides and rocks from the slopes above, or by debris that is carried down the watercourses from high-up on the mountain.

County sheriff Bill Brown has warned Montecito residents there is a strong possibility of future debris flow and the need for future evacuations. He says the new normal is “extensive danger.” It will take less rain to move debris than it did on 1/9. If anticipated rainfall is projected to be a half-inch per hour or greater, a mandatory evacuation notice will be sent to both Red Zone and Yellow Zone homes. Access to local roads in Montecito will be closed off by the California Highway Patrol two hours before a projected major storm. All voluntary evacuation notices have been eliminated. Personal discretion is not an option.

Harry Kolb describes the real estate risk this way: “Everything depends on if we have another major flood within the next few years, or another rain event forces our creeks to overflow. The damage to real estate values will be severe and long-lasting.” Adds Kolb, “I expect that each brokerage firm will require a disclosure that is quite discouraging, just to be on the safe side of any possible future liability.”

Risk #2. The Cost and Future Availability of Disaster Insurance

Wendy Gragg asks: “Will catastrophic insurance for fire, flood, and earthquakes be available for homeowners and, if so, at what price? Some homeowners are reporting that their insurance companies are cooperating, while others have had to retain attorneys to settle claims on their behalf. Disputes range from evacuation reimbursements to mud removal to replacement values for homes and furnishings, to repeated deductibles to landscaping damage. Litigation will delay the rebuilding process and negatively impact the aesthetics of this community.”

Harry Kolb adds:“Any adjustment by insurance companies to reduce liability by reducing coverage would have a significant, if not destructive, effect on real estate sales. It would red-line our community as unsafe.”

Risk #3. The Possibility of Montecito Running out of an Available and Affordable Supply of Drinking Water

Montecito cannot decide whether to “pray for rain” or “pray for drought.” Rain can bring massive mud and debris flows, but prolonged drought brings an end to Montecito’s character as we know it. If Montecito becomes a Cape Town, South Africa, with no drinking water, we should take every water manager presiding over his or her own fiefdom and feed them to the “Great Whites” for failure to find and fund cooperative solutions to a water shortage that is staring us right in the face.

Risk #4. Traffic, Noise, and Parking Woes

Encell worries that “new buyers in Montecito will be looking at years of traffic congestion, noise, and parking problems associated with cleanup and rebuilding in Montecito.” Kolbsuggests that fast“bridge repairs are the secret to greater mobility.” Caltrans and County Public Works need to get 192 East Valley Road and our local roads back into service. We need to reduce the gridlock on Coast Village Road, reduce the dirt and grime in this community, and improve the quality of life, or affluent buyers will choose Hope Ranch, La Jolla, or Carmel as attractive alternatives.

A major threat facing Montecito is the continued survival of local businesses on City-owned Coast Village Road and in the upper village of Montecito from growing traffic congestion and parking woes that discourage shoppers.

Risk #5. Changes in Land Use and Permitting for Remodeling or New Construction in the Red Zone

Gragg asks, “Will some homeowners be denied permits to rebuild in the “extreme-risk” Red Zones? Will creek setbacks be modified? What new restrictions will be mandated by County Planning, the Montecito Planning Commission, or the Montecito Board of Architectural Review for homes rebuilt in extremely high-risk areas?”

As to the cost of rebuilding, Encell foresees that “Montecito already had a tight labor supply for construction. The additional labor to rebuild and repair hundreds of new homes will push construction costs even higher.”

The Bottom Line for Montecito?

As Das Williams and Darcel Elliott guide a community effort to develop a locally crafted plan for rebuilding Montecito, five issues need to be included in the agenda: (1) Solutions to lessen or alleviate future debris flows; (2) Regional solutions for water independence at an affordable cost; (3) Assurance of a choice of homeowner insurance policies at a reasonable cost; (4) Improvements in traffic flows in Montecito to protect local businesses and restore quality of life; and (5) Strike the right balance between rebuilding homes in the Red Zone while ensuring smart, safe land use and permitting policies.

If we are serious about rebuilding our community to make it better than it was before, protection of our community character and real estate values should be at the top of the list.

What real estate pros say about property values going forward:

Dan Encell: “Most Montecito residents are committed to our community come fire or high water. People who can afford to live anywhere in the world will still choose Montecito. We need to work together as a community to overcome whatever obstacles come our way.”

Harry Kolb: “The public has a very short memory, but because these twin events were so significant and received so much global attention, recovery may take much longer.”

Suzanne Perkins: “My crystal ball is foggy. Sales of homes are down but will get better when buyers can get to properties more easily. No one seems to want any properties that were damaged or destroyed in the mudflow area. Unique, undamaged properties are still going to command interest.”

Dinah Landi: “With the tragic death of Rebecca Riskin in the debris flow, Riskin Partners has been emotionally affected by this personal disaster. It is too early to tell how the Thomas Fire and subsequent debris flow will impact our real estate market. The majority of Montecito’s natural beauty remains untouched, although parts of our landscape look different.”

Michael Phillips: “If those who lost their homes choose to remain in Montecito, lower supply and equal demand will assure upward pressure on prices of homes outside the creek areas that were flooded.”

Nigel Copley and Cristal Clarke: “Montecito will always be a commodity in demand, either from local buyers or buyers moving to the area from all over the world.

There will be sellers who make emotional decisions to sell, although we have not yet seen that uptick in activity.” 

Wendy Gragg: “Time will tell how this all plays out. I am proud to be a part of such a vibrant and positive community. I am hopeful that the insurance companies will do the right thing and pay homeowners’ claims to get the rebuilding process started. Montecito is and always will be the very best place in the world to call home.”