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Trust the Process, a podcast where we talk about new home construction, the real
estate market, and everything in between. Today we're gonna talk about the
topic that's really top of mind for a lot of people right now, and it's making
dominating national headlines, would be the fires in California. Given that
Nevada is so close to California as our border state, how does that influence us?
What does that mean for us? What does that mean for our housing market? And some
of the things that we may or may not see as we as this crisis unfolds. So I'm
gonna hand it off to you. Obviously we know the tragedy that's happening there
and yeah it's can't not see it. Right. So many people affected. Yeah it's a lot of
it's a lot of devastation and a lot of things laid to waste and a lot of
ramifications I think that will feel for years into the future. I agree. There are
just locally as a Las Vegas resident, they're a huge neighbor of ours right.
I mean they're on the order of what 25, 30 times the size in terms of population.
Yes. Of Nevada and sometimes I feel like Las Vegas is a suburb of Los Angeles
anyway. It does sometimes feel like that. Now when they've talked a little bit about
the train that's gonna go between there's almost that imagination that it is. It
kind of feels like it right. It affects everyone but I do think it'll have
it'll have pressure on the entire country. You know, it's small ripples. Locally
it'll affect obviously Los Angeles in terms of how that looks from a
rebuilding standpoint and that's why we chose to talk about it on this episode
or as part of this podcast because around 15,000 at the time of filming this
we're in the last week of January 2025 and at the time of filming this it's
estimated that around 15,000 structures were destroyed. The vast majority of
those were residential structures. We're homes. Yeah tragic. So that is a lot of
inventory that is now out of the market a lot of devastation obviously loss of
life and loss of memories and things that it's hard to seems straight to talk
about in this context but it does matter and it will it will affect building
policy and it will affect building practices. It will affect net migration.
It just there will be people who choose not to rebuild or people that make this
there. You know what? This is their line in the sand and say I was on the fence. I
was going to move in the next five years but I don't want to be the next victim.
I don't want to be the next person that's affected by a natural disaster in
California. It's going to be so expensive to rebuild. It was such a it's an
expensive loss. It's an expensive loss in terms of where it is just
geographically. It's very challenging to build in a lot of those locales and the
Pacific Palisades a lot of those slopes and mountainside homes may be cost
prohibitive to build. They may not even see it pencil out for many many years so
that kind of loss is really how do you even calculate it? Where do you even
start? Because it wasn't just the structure that was lost. It was
everything else that maybe the whole viability of that site is now no longer
buildable. Now what is it worth? A vista? I mean it's you buy it to put a picnic table there.
Right, and I have heard some discussions that because of the location and because
the you know some of those obstacles that City County may not even allow people
to build in those same locations. And what is that in itself is a migration question?
That's right. I mean if you're displaced and you owned that parcel and it was
passed down especially some of the Altadena real estate that was lost a
lot of those homes were handed down. Those aren't affluent people as you know
in general. A lot of that that eaten fire the damage caused by the eaten fire
affected more middle class and even lower middle class people that their
largest asset was their home and maybe that asset was handed down over the
generations and it's underinsured or not insured or now going to be in the
neighborhood that is completely burned out including the commercial areas. So
who's who wants to be the first one in? And the businesses certainly don't want
to be the first one in. They'll need the rooftops to support the businesses. Sure.
The people don't want to live where there are no cafes and restaurants and
dry cleaners and gas stations and general conveniences of modern life. So who
who's going to who's going to take the investment? Who's going to take the risk?
Right. And then if you look at it from the eyes of the speculative builder like
our company where where is the off-ramp? How do you how do you how do you
calculate end-of-day value of a finished product? Let's say you were to pick up
six or seven lots demo the homes what's left of them and rebuild with the
intent to resell where's your market? Who's going to take that risk? Are you
going to shoulder the risk of not only what does the home look like at the end
in terms of market value but what is the process looking getting there and what
kind of regulation and red tape are you going to have to fight to tear down and
to rebuild to make it a commercially viable endeavor? So we have that
overlaying it and then you'll have the individual homeowners who may choose to
rebuild. Did they have enough insurance? Is what they owned before even
approvable with current zoning and city planning? So those are the kind of clouds
that are hanging over the entire process and when you look at that times
let's say 90% of the structures lost were residential and if the estimates are
accurate at 15,000 and that's not more let's just take those two assumptions
we're at 13,500 residences. How many of those were for family homes that like I
mentioned may be incongruent with current day zoning. Now it's one home or one
home in an accessory dwelling structure we'll see a net loss of homes and then
now what we're seeing is a push-pull and I feel that both sides are a little
correct because there's a push to say we have to rebuild we have to cut all the
regulation and red tape and then there's a push on the other side of the
argument that well if we just rebuild low density suburban housing in the same
like kind and quality of what was there what's to stop this from happening
again and that's not just a desirability standpoint or an intellectual
argument it's an insurability argument too. What kind of insurance company is
going to want to take a risk if you look at the actuarial risk of ensuring
something that's the exact same product that was there before give or take at
2025 or 2026 year built but it's still in essence the same product that was
there that in a one and 50 year window was annihilated and everything in an
actuarial I'm not an insurance expert but everything is about the likelihood of
an event a major loss happening in X number of years over the amount of
value of that loss so if a fire is an every 50 year event that property
becomes insurable they're pretty much having to hit you with the 2% risk so
your property is a million dollars 2% of that if you have a one in 50 year chance
of a total loss just general of these are more that goes into these
calculations and that but in general that's a $20,000 a year policy because
it's a 2% risk of a loss so when you couple that with other natural disasters
and over other overlays and then just an overall appetite for wanting to be in
that business at the end of the day insurance is a capitalist endeavor so
you're going to have to have people that want to take that risk even if the map
is 20,000 maybe the the market has policies priced at $40,000 and it just
might be an uninsurable insurmountable hill to climb and when you look at the
affluent areas that might be okay it might the market forces might out outweigh
that it'll still hold down their values in the future but when you look at the
more middle-class neighborhoods in that market maybe a million dollar homes
probably a middle class and a lot of Altadena 1.2 which represents maybe a
1600 square foot rambler single story on an eighth of an acre 56 in a
square of a lot how does that math work out how do you hit a middle-class family
with a 20,000 or $30,000 insurance premium plus their mortgage taxes and
everything else that comes with running a household so it's those types of
considerations that really have a lot of people worried it's not a fair playing
field exactly so there isn't and like you said they're not all affluent so so
how does that look? A lot of what and I think LA is a massive wealthy city that
land will be reimagined and reused but it's going to be so challenging to go
through that web of problems similar to our foreclosure crisis that really had
a lot of the Sunbelt and high-growing cities it took a lot of time a lot of
that land was held in bankruptcy courts or was part of a settlement or part of
a company that had since gone bankrupt so you're driving through these
neighborhoods with all these buildable lots and you're thinking there's still
a demand for housing and the numbers still pencil in some ways why is that
not being developed yet it just has to work its way through the courts and the
financial systems and maybe it's wrapped up in bank like I mentioned
bankruptcy courts and and other kind of barriers and hurdles that we don't even
see and aren't overtly obvious so we're going to see a push-pull and in the
meantime where are those people staying exactly the displaced people that if you
figure it's on the order of 50 to 100,000 people what is that what is that
look like to the greater LA market what does it look like to Las Vegas there's a
lot of op-eds already publishing that no 100% have knock-on effects to the Las
Vegas probably rental market maybe we saw that and we'll have we have another
episode on ration we saw that in COVID I mean we saw various states with their
different regulations and rules around COVID that was sometimes just the line
in the sand that may have pushed them to a 2021 move to a different state versus
what would have been maybe a 2030 move or 2025 move it just kind of read it kind
of reshuffled the deck and the taxes and a lot of living all those things a lot
of things right if they're 30% if they were cost of living probably depending on
the city and confused and not yet exactly or three towns over was displaced but
you're fine what does that look like what does that look like for just these
kind of bordering cities to LA bordering states to California so it'll be
really interesting and we'll probably be talking about that that's why I said
these these will have long ripples and it will affect a lot of things from a
regulation standpoint when you look at what is it going to take to rebuild when
I talked about that push and pull so you have existing zoning laws existing land
use existing building codes that's just what's priced into it now but what and
will it be politically advantageous to reimagine these things and cause more
you know more regulation and have more pushes for barriers you fire natural
fire breaks more setback laws stricter setback laws and when they talk about
it from an intellectual standpoint it's easy to say but in a in a country with
private property who's to determine oh your street is now a boundary zone so
we're not going to allow development on your street who how politically popular
is that domain right is that what it looks like I mean when you when you
think about it becomes people who wouldn't want that or wouldn't be willing
to give up what they do have exactly that they could come in an eminent domain
now that is a very long drawn-out process that has appeals may even go to the
state supreme courts maybe appeal higher than that so it's just very tricky
because you're going to have an intellectual argument that's probably
not wrong right they are you could steal man either side of it yes and I
think that it's going to be interesting to watch the push pull right now it's
easy to get action because of cities literally still smoldering at the time
we recorded this last week of January 68% contained it's a little over half
contained it's still a very active and unfolding situation what does that mean
how does that ripple through so right now it's very politically popular to talk
about Newsome has an executive order that said the coastal Commission he
basically defanged the California Coastal Commission so the California Coastal
Commission could be its own episode so what it it was sworn in in the
mid-70s sworn into law and it essentially regulates the coastal zone it's
1,100 miles of California's coastal zone pretty much the entire border where it
hits the Pacific Ocean and it only pertains to development okay access to
the beach and overall preservation of the coast so it dictates the entirety of
the coastline but it can go as short as 3,000 feet in from the coast and as far
as three miles inland depending on where you're at they have full veto proof
authority to transcend city planners actions taken by local elected
government officials and the ability of fine private citizens so effectively
what it does yes what it does is grants one body go on governing body that was
originally voted in in the 70s that allows them pretty much full executive
authority of the entire coastline and like I mentioned as short as 3,000 feet
and as big as three or four miles in coastal so when you think about the kind
of reach think about how far four miles from the beach would feel right you're
gonna go that's not even we're not anywhere maybe we're a beach town but
we're not a beach from property we're four miles in four miles in when you
think people are building right up to the beach there's a lot of jurisdiction a
lot of exactly and it's by the way it is even more than residential so it act
also dictates commercial but also dictates room rates and how they want a
diversity of room rates along California's coastal hotels and hospitality
industry in fact one hotel operator was fined 15.5 million dollars for
converting his hotel to a boutique high-end luxury hotel without their
approval and operated it for several several years never asked for their
permission and was slapped with a very very heavy fine for that so you can see
the the far-reaching power and authority that they say that regulation you know I
think a lot of what it is is that yes it encompasses a large land area but how
many citizens does it truly affect and you've got a lot of these little
anecdotes and these stories which I went down the rabbit hole and read and some of
them are absolutely atrocious I feel that it when it's affecting on the order
of 100 people 20 people one developer one hotel owner it's just not a popular
story it doesn't get brought up so now with the wildfires though and we're
talking 30 to 50,000 citizens displaced I think it was smart of Newsom to say
we're gonna defang this for a little bit temporarily let's get this place rebuilt
because they have full authority let's say you own let's say you're in one of
their zones you're two miles in from the coast and you want to pull a permit to
build a single family home they have full authority to stop it and their default
generally if you talk to my architect does a lot of work over there if you talk
to them their default answer is almost always no and then because it's
considered an environmental agency it allows for public comment so if you're
converting a rundown fourplex into a five over 100 unit apartment building
every neighbor in there is going to have public comment and the ability to
basically petition the California Coastal Commission to stop the project
and the appeals process alone takes about nine to 11 months just the appeals
process if you're told no and many times it's completely overridden really good
example was were two condos in Orange County condo complexes on the water
they needed a breakwater bill one condo was to save the development one condo
was built in 1974 which predated the California Coastal Commission and the
guidelines in the California Coastal Commission say they may approve
structures that will prevent the demolition or the loss of existing
structures so the Coastal Commission had another application for a condo
complex built in 1984 they're about 500 feet from each other they approved the
one built 74 and denied the one in 84 leaving that condo complex completely
vulnerable to erosion to loss from weather just general coastal concerns and
their argument was well you existed after the California Coastal Commission you
can see the level of fury and ire that that commission draws from local
residents and developers and it's funny to read the stories of the local
jurisdictions like City of Newport Beach coming in to direct opposition to the
California Coastal Commission for instance they sold a parcel of their
wharf to a developer for several hundred million dollars which really helped
the city and the California Coastal Commission blocked it saying that you're
going to cause undue strain under the local streets and traffic and people
aren't going to be able to park and access the beach appropriately another
great story and I won't I won't fill the podcast with anecdotes but there was a
single family home owner that wanted to build an accessory dwelling unit for his
disabled daughter to live in after he passed and they opposed it because the
pathway he was going to plan for fund and execute to preserve beach access that
was previously through his property they said that it wasn't as good of a view
for hikers when you're rerouted it 40 feet to the east so they denied his
entire accessory dwelling unit even though his local jurisdiction and
building department had approved it they have a lot of power and it's an entity that I
didn't even know existed yeah and I guess that's because Nevada doesn't have a
we don't have a real deal with you know that municipality that's right that's
interesting and as mentioned it how many people does it truly affect not enough
to make headlines but now it will know but it will for sure so yes so imagine
pretty much every home in the Palisades would fall into this I doubt all to Dean
is probably far inland enough to not deal with the Coastal Commission but
that's just one of many one of many commissions that you might have to deal
with to get your projects approved but you can see just those little anecdotes
of those are just layers of little stories every single home every single
every single home every restaurant everything everything that story or
that's right story that they're gonna battle that they will all right and the
last count in the Palisades alone was about 6,500 structures so there are 6,500
potential anecdotes now like I mentioned that those have been temporarily
defanged so we'll see but there that's that's popular to say and do but how is
it going to look where the rubber meets the road when the headlines in six
months move on to some other calamity or move on to something else what's it
will that look like will it come back will will the will the Coastal
Commission and it's I think 200 employees and 48 million dollar budget on the
scale of the state of California is nothing but yield so much power are they
going to fight for their survival because you see something like this could
this be the end of that commission could we see it realize wait this commission
has no popular support and plenty of coastal states and towns manage their
coastlines completely fine without some state appointed regulatory body so what
I found interesting was their ability to veto state and local building
departments and state and local municipalities or should say local
municipalities really interesting non-elected not a single person is
elected in that office itself and before we even get to the building part so the
regulatory bill portion of it what do you think that land value will be at the
end of all of this you know I going to be parcel to parcel or will it overall
there's some decrease or I can't see how it if for sure lost is our ability
when the entire town is lost LA Metro is such a huge animal that could it easily
be absorbed absolutely barring not withstanding any of the personal loss and
personal property loss that is objectively prime real estate now it has
its own headwinds the insurance sure but it's desirable in its in the when
you're in a city that large want to be there right where they're my choice
exactly an accidental right that was right desired location and we'll talk
about this in our migration episode the California is still one of the top five
states for attracting new residents it's not growing net because it's losing
people as fast as bringing them in but it is don't let the headlines fool you
it is a dynamic economic powerhouse that pulls in a lot of people so you're in a
growing state you're in a established Metro plaques of I don't I think 13 or
14 million will put a correction if it's more than that it's a lot if you count
the metro area if you run into the inland empire and you kind of how far can
you drive without seeing desert if you count that the boundary you know
depending I'm sure the Metropolitan statistical area by the census is one
number but you look at a place like that and what a drop in the bucket 12,000
homes is it'll be nothing to find the demand but I think what is it gonna look
like and how is it going to collide with private property how are you going to
get the 50 residents on this block to also at the same time to all have the
same around this house right and burn you know they only had nominal damage
right one next door that's right we lead us great it's so it's it's not it's
piecemeal that's right it's not it's not 150 acres in the desert which we have
the benefit and the beauty in these growing Sunbelt cities we have that
kind of cohesive nature to say okay this is a big big tract of land and we can
kind of reimagine it any way we want which I guess that brings me to the
next spot was do they come here I mean there are a lot of good reasons that
they might consider so how what does that do to the influx here oh I think we'll
definitely see it macro data I don't know if even 50,000 people and we'll talk
about that in their migration episode if that how many come to Nevada how many
come to purchase how many come to rent how many live a family in Stain
California what what does that really look like when you look at the total
numbers of people that moved to Nevada on the order of a hundred and our 360
thousand over four years it's not it's not time then even assuming every single
one of those people that was that you know that are displaced come to Nevada I
think it'll probably ripple out and we'll slowly kind of incrementally feel it
mm-hmm and like you said it's not going to be immediate no in people have a lot
to store through there yeah so I think that we're and we're also used to a lot
of inbound migration from there anyway so we might not even really feel it
because we're used to ceiling I just feel that the numbers are so massive of
what we're already seeing I don't know that it'll have a dramatic increase
we're already a tight real estate market we're already appreciating real estate
market we're already a tight city we're already seeing a lot inbound migration
and growth is are those numbers going to really bear it out how many of those
people moved to Austin Texas how many moved to just an inland city in
California how many people moved to Seattle so there's a Arizona even
further I mean exactly so I think so it's it's a scale that's unimaginable if
you try to put 50,000 people into an arena but when you spread it out over
six or seven states that would be candidates for moves and relocations I
think that we might not really feel it but it'll be interesting and when you
look at what does it do to building industry when you have that it's not a
growing city it's not used to that base of labor that we're used to in these
Sunbelt cities that are growing the Phoenixes in the Las Vegas and the
Charlotte they have a labor pool we have an existing labor pool so we might
feel that first before we fill anything else but I think they're they will
struggle without having the housing stock for that labor force what kind of
premiums will you have to pay to get the labor force out there to start
rebuilding right will the regulation be a blessing in disguise because it will
throttle down redevelopment and will throttle down the rebuilding process to
where it is somewhat manageable imagine trying to rebuild 15,000 structures in
a 12-month period we built what we say around 12,000 homes last year in Las
Vegas in addition to all the other development and growth that might happen
in the city that large redevelopment things tear down stuff like that and a
sparse labor force nationwide too so now are there people from Vegas that go
there to to build it that's what I'm worried about kind of what you call it a
brain drain but also a labor drain where we'll bear labor statistics already
estimates were about two to four hundred thousand construction labor type workers
short over the next so many years three or five years I definitely feel it I
definitely feel it yeah it is it is gonna be a challenge and then what does it do
inflationary pressures on building materials and just logistics of all of
those things that that are going to come into play and I think the biggest
factor that people are glazing over is something that you brought up but what
is the overall desirability of that now but well and and how does them how do we
have price discovery and that's one of my favorite terms right we where's the
price discovery we've never had essentially an entire city if you look
at Altadena or Palisades we've never had an entire city burnout that's part of a
larger major metropolitan area where's the price discovery on what what are
those parcels worth what are the homes worth when they're done
where's the desirability because you could make an argument that you could see
luxury homes built on every single one of those two three four million dollar
homes luxury homes by most standards is there the demand there the geographic
supported a lot to consider obviously it's an unfolding situation and we kind
of it's the unknowns in it are really unsettling it's very I mean and it's not
even it's our neighbor it isn't even it isn't even our backyard here in Las
Vegas Valley but because they're our neighbor it's you know you feel for them
and you want to understand what they're gonna go through and be somehow
empathetic somehow yeah maybe help in some way and you know that you are
watching it like a cinema movie but it's something that is interesting to watch
what it's gonna look like as as this unfolds and hard to envision I just
can't comprehend how you know wildfires used to be wildfires just happened in
the wilderness straight through town right isn't something that used to
happen right here about it right suddenly this has become a thing is it the
way that we're building is the way that we're living is it you know products
that we're using or is there is there some other ecosystem happening that's
allowing for these fires to take place you know in Maui and the one I mean
there just have been a series of those situations right isn't yours is it a
numbers game is it that those areas that our fire prone didn't have the
development and then the scale of geological time 50 years is a blink of
an eye so if you were to look at it and a scale of a thousand years and you'd
say those homes popped up and then there was literally a fire how could they not
have seen that happen if you're looking at it on that scale on that scale of time
so I think there's a lot of things that that come into play weather patterns and
climate change I think that are affecting droughts droughts are longer harder
more intense so I think that has a play in it I think there's I don't want to
pontificate but I definitely think that there was probably some mismanagement
in terms of brush control and if you see the kind of way it was managed it is
kind of interesting that it didn't happen sooner that there was not some sort of
fire sooner you have all of those people that means there's funding of the fire
department and some of the exactly right right those things too that obviously
you know are all topics of discussion out in the news world but for us to kind
of bring it back home and think about how that affects us right and just the
national housing market as a whole what it could potentially mean and and
something that we talked about in our other episode about headwinds and things
kind of affecting the market that I regret not bringing up was the insurance
crisis and if you look at what it's doing to premiums in many states Florida
North Carolina any hurricane prone state any seismic prone state wildfire prone
state those are that could be in a you know an upcoming crisis that is not
even on our radar when you think about the actuarial math that goes into is
this a one in thousand year event one in 50 year event one in 500 year event
turns the math from a $20,000 premium a year to a $2,000 premium a year
and categorically maybe it isn't always a fire like you're saying maybe it's the
earthquake maybe it's a flood maybe it's a mudslide and there are so many other
natural disasters that happen and try it nationally you know that we're not
affected by here and what's right there we're weather conditions we don't have
hurricanes whatever we're grateful for some of that we do have the heat we have
the heat we don't have enough vegetation for fires so that's something but yeah
that'd be interesting to see how it unfolds yeah it will be an ongoing but
it felt relevant to discuss it now as it's happening where we sit here you know
safe and cozy there are people who've been displaced and who are suffering from
this and so to look at that and think about that and how that's affecting not
just them specifically but how the ripple effect as as Michael mentioned will
carry out through both Las Vegas Valley and nationally so it will be interesting
to watch and we thought it was worth bringing up and and I appreciate your
take on it yeah that's you know the entities that are making some decisions
and well after go from here so it will remain to be seen remains to be seen I'll
look forward to checking back in when it's no longer dominating that once to
say how did that work out did the Coastal Commission remain defanged and did
they speed up permitting it'll be interesting to watch so well we'll keep
watching it with you and give you updates as time goes if there is anything
that we're noticing in the numbers here in the Las Vegas Valley or otherwise
so thank you for joining us on this episode of trust the process and we will
look forward to seeing you next time thanks bye bye
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