WINE COUNTRY REAL ESTATE WARMING UP

By John Bergman & David Ashcraft July 2005

Remember this chart? It was prepared in 2002.

Getting Stronger

Based on the current market direction we are about on track with our projections regarding vineyard related real estate. The vineyard related real estate market is starting to show some vigor and signs of strength. Over in the purely residential market we have been hearing “Let the good times Roll” for several years now. As you might guess there are multiple categories in the Residential - Agricultural Real Estate Market. The most active and “hottest” real estate market has been in the entry level / first time homebuyer category and median level homes. Not far behind in the appreciation race are the above average homes that range anywhere from $700,000 - $1,200,000 followed by the Upper End Level that can run up to $2,000,000. Beyond that there is the Estate Level that can run up in to the tens of millions of dollars. These categories include all properties that have a residence on them. The higher end may include a vineyard, and perhaps a winery as well. Let’s not forget the purely agricultural pursuit where grapes are the only residents and one can find a starter kit for around $1,500,000.

Let´s Hear It For "Interest Rate Appreciation!"

Wine Country property sales appear to be on fire in certain categories. Wine Country residential properties are not much different than residential properties in other areas with the exception of grapes and wineries in some cases. Some other exceptions may be fabulous weather, excellent food and produce, spectacular vistas, proximity to a great city, snow skiing and the ocean to name a few but who’s counting anyway. We’ve mentioned that the hottest part of the market is the entry level and median price levels. This is a direct result of interest rates being about the lowest they have been in over 30 years. Renters are finding it cheaper to buy and have their debt payments close to what they were paying for rent along with getting tax deductions they never knew existed. The lower interest rates have pushed the envelope of buyers coming into the market place forcing this to become a “Sellers Market” and causing inflation in housing values to soar. This appears to be a purely interest rate driven market.

The increase in the lower end of the market has pushed the upper end higher as well, but at a much slower pace. For every Upper end or estate buyer there are 1,000 entry to median price range buyers, causing a slower sale at higher prices for the upper end properties.

Bait & Switch

Another phenomenon taking place is existing homeowners are transforming equity into cash via refinancing for lower rates and payments. Most new low interest rate loans are not fixed, and have a “Teaser Rate” for a short period of time based on current market conditions. It is only a matter of time until these rates begin to rise and the lower monthly payment begins to increase. There has also been a run on “Home Equity Loans” with similar initially attractive conditions. Both of these types of loans are wonderful in the beginning, but as the rates rise, so do the monthly payments. Many of the “Adjustable Mortgage Loans” will allow the borrower to make “Negative Amortization Payments”, which is a payment less than the interest accrued and will be added to the principle amount owed. So when the rates go up, the borrower has the choice of making the larger payment to maintain a fully amortized loan, or going negative causing their loan balance to grow each month.

Reality Check

The homeowner that has pulled out massive amounts of money from their home equity yet retained a very low monthly payment feels that the time has come to buy all of the stuff of dreams with their newfound fortune. This is great for the economy, the money keeps moving and everyone along the way benefits as the money passes through to the borrower, then to the auto dealer, then to the insurance and/or real estate agent then to the grocery store so on and so forth. However when the rates go up there are those who will open an envelope to receive an unwelcome reality check. Many recent homebuyers purchased with little or no down payment, took out second loans and are basically way over leveraged. If there are any hiccups along the way they will get stung once their adjustable loans run out and interest rates climb.

While this inflation is going on in the entry and median price ranges, the higher end of the market is right behind, but a little more reserved and slower to move to the heights that their lower priced neighbors. We’ve found that the higher the price range in real estate the less need for loans. Most of the multi million dollar buyers are all cash buyers and more conservative all around. You could call them “Bullet Proof”.

Vineyard Value Vigor

The vineyard / winery real estate market seems to be a different industry altogether than the strictly residential market. There are many moving parts when dealing with a vineyard, vineyard estate or winery sale. For this very reason we had seen an actual decline (until recently) in the vineyard, vineyard estate and winery market while the strictly residential market has soared over the last several years. Again, the sub categories are driven by different forces. While the strictly residential market has been purely interest rate driven, the vineyard, vineyard estate and winery market seems to be driven by an improving economy. The vineyard, vineyard estate and winery market are a combination of business and luxury items both in great demand when the economy is doing well. After a barrage of horrible media coverage surrounding the wine industry for the first part of the decade the last year has brought optimism and positive results from wine country business interests along with a nice PR burst from the movie Sideways. It appears that we have started the long road back up the vineyard real estate appreciation curve with increasing wine sales and new interest in grape purchase agreements. We have seen large vineyard properties in Napa, Sonoma and Mendocino Counties beginning to sell that have been on the market for 2 to 3 years. In fact one in particular stands out. A 30+- acre vineyard property on River Road in the Russian River Appellation sat on the market for over 3 years. Then we listed the property and in 60 days it sold. Another was vineyard estate property on Westside Road in Healdsburg. The property was taken off the market for over a year, and clients we had shown it to a year before decided that they wanted it, and an offer was drafted. Before the offer was presented another offer came in and our clients missed out. Here’s one for you. Mendocino County went years without a larger vineyard or winery sale. Believe it or not, we have had recent experience with multiple offers on large vineyard and winery properties that have been on the market for 2 to 4 years in Mendocino County. As you can see it looks like things are starting to heat up in Mendocino County too.

In the year 2000 the average price for one acre of vineyard in Napa County was valued at $92,500 in and $80,000 in Sonoma County. Since that time these values have slipped by up to approximately 30% in some cases and areas. However, in the last 6 months we are seeing the values begin to increase and in some cases surpass the 2000 mark.

Market Strength?

One of the main topics of conversation you are likely to hear floating around the valleys is, how long can this real estate market continue? We think there are multiple answers to this question. First, it seems evident that interest rates will rise. The Fed continues to rachet up the short-term interest rate and looks content to do so as long as they feel the economy is in good shape and shows further improvement. That said, many people are dependent on the short-term rate for their adjustable loans and home equity loans that could cool off the overheated strictly residential real estate market. Secondly, if the economy continues to improve the vineyard, vineyard estate, and winery market should continue to appreciate even as the purely residential market begins to stabilize.

Nevertheless, if Mr. Greenspan keeps our long-term interest rates down, and the public feels confident about their future, the market should be very strong. How long will this last? Who knows for sure, but a look back at 60 years of cycles says that we are in for another 6 years of letting the good times roll.

If you’re a Seller things are getting better and will continue to for a few years to come at least. If you are a Buyer, it’s never a bad time to buy, as vineyard values have shown over 100% return every decade for 60 years. Buy, hold, enjoy and make a lot of money along the way.

If we can be of service to you, our policy is confidentiality and to work with our clients needs first and foremost. Feel free to call us, read our other articles and, view properties that we have for sale.