Market Uncertainty, How is the wine country real estate market performing?
Fall 2006
By John Bergman & David Ashcraft
You could say we entered 2006 with a BANG, not only were there torrential rain storms and flooding, but there was also tremendous momentum in vineyard, winery and estate transactions. To put it mildly the first part of the year in our business was hot and heavy. In January, our open escrows totaled more than half of our entire sales of the prior year, and 2005 was a banner year. 2006 looked like it was going to be off the charts. Then the sun came out in May and the buyers went on vacation.
What happened?
Ok, the buyers didn’t really go on vacation but the momentum has dissipated somewhat. The buyers are still buying, but more cautiously now. The media is saying that the sky is falling, so some people are ready to buy a helmet. It is likely the war in the Middle East has people on edge. Of course the consistent rise in interest rates, the specter of inflation, and outrageous fuel prices are causing a bit of uncertainty. We all know that the market, real estate or otherwise, doesn’t like uncertainty.
Who knows for sure?
What we do know is that things have eased up a bit and we see some prices dropping. However, the prices that are coming down are mostly those properties that were over priced or unrealistic in the first place. We are seeing more inventory and more willingness to negotiate between buyer and seller. That said, according to most of the statistics, prices are higher than last year at this time across the board. So, there appears to be some resilience in the market place for higher end properties.
Settle Down
It would be safe to assume we are going through a “Settling Out” period. Interest rates are expected to level out sooner than later, the stock market is fluttering around the eleven thousand mark, Iraq says that they will police their own country by the end of the year, alternative fuels are making inroads on reducing our dependence on fossil fuels. Yes Virginia, there may be a Santa Clause………….. Well, at least we may have a bit more certainty in our future.
Regardless of what we may hear in the media we can’t consider this as a “Buyers Market” especially when what the media is mostly referring to the lower end residential market. The hardest hit in this recent slow down are the entry-level residential buyers. They were mostly renters that seized the opportunity to purchase with no down payment, 1% deferred interest, great tax advantages, and pay less than they were as renters. Unfortunately what usually looks to be good to be true usually is. In this case the phenomenal low interest rates have gone the way of the dinosaur. Even so today’s rates are still historically very reasonable and thus provide optimism going forward once things settle down.
Point Of Interest
Lets take the interest rate subject a bit further as it seems to be on everyone’s mind. The vineyard, estate and winery real estate market tends to run on a slightly different plane than the residential market. We’ve seen that most large vineyard, estate, and winery buyers are not tied to the going interest rate for financing or overly concerned about the next quarter point raise in interest rates. These buyers are typically going to pay cash or put a significant amount down. These buyers have the wherewithal to maneuver through the markets ups and downs and aren’t going to be crippled by the expiration of an exotic 5-year adjustable rate mortgage. We continue to see these “deep pockets” put money in the wine country for various reasons including the lifestyle and investment potential.
Out of curiosity, we wanted to see what the actual numbers were for sales of estate properties and vineyard / land over the last 5 years. The results are very interesting but not unexpected considering we have seen the trends first hand. Sales have increased dramatically from 2004 to present for estate and vineyard properties. The information came directly from the Bay Area Real Estate Information Services multiple listing service databases. The categories are somewhat general but the trends are clear.
When you look at the Estate / Residence chart you can see that 2002 – 2004 was fairly steady in the number of sales. Then in 2005 things really started to take off with a dramatic increase of sales over $3,000,000 in Sonoma County. In 2004 there were only 7 sales of $3,000,000 or more, in 2005 there was an astonishing 25 sales over $3,000,000. 2006 looks like it may come in a bit under last year but still not a bad year so far. The trend in Napa is nearly equally as impressive for in 2004 there were 10 sales of Estate / Residences and in 2005 more than doubled up to 23 sales. Not too shabby. In Napa County 2006 looks to possibly push past the sales from last year as there have already been 19 sales above $3,000,000 as of the end of July.
The next chart looks at the sale of vineyard and raw land properties. You can see the overall number of sales is much lower than the Estate / Residences but the trend is similar.
Looking Forward
Where will things go from here you ask? Well time will tell. However as things settle down in the “bigger picture” we will likely see slower growth than we have had in the last 2 years, but growth in any case is still good. Prices should not drop in realistically priced properties over $2,000,000. However we will see some very good opportunities in the lower priced residential market. For those with money that are ready to make quick decisions when that opportunity flutters by, now is the time to look hard for the deal.
Yes Vineyard values will continue to go up as they have in the last 2+ years. We are still seeing the tail end of some wineries having to down size or sell due to debt taken on during the early 2000 years. All in all wine sales are up as the consumer is buying higher and higher quality wine and it appears the don’t mind paying a little more for that bottle of wine that they love so much if its really good.
The “Settling Out” period will change as we edge out of the war, interest rates stabilize, gas prices hopefully trend down with new competition from eco fuels becoming more in demand, our corn and soy bean farmers will finally be able to buy that new tractor and pay off their agricultural lines of credit.
What we have learned from examining the number of sales of vineyard, winery and estate properties over $3,000,000 in our wine country is that they represent a very small percentage of our over all real estate market. However these property sales drive a major part of our local economy. As these bigger than life sales take place, more proceeds filter throughout our local economy including increased tax bases for the county government, employment as the money flows through to the grocer, the gas station, retailers, restaurants, lodging, lest we forget the wineries, and grapes sales made to them.
All in all, our cycles will come and go. We just have to recognize that they are with us all of the time and not to panic when we read that the “Sky is Falling” from some media writer that gets the story half right and wishes to sensationalize his/her story. The beat will continue to go on and life is good in the wine country, just relax.
