The Surf-Estate Bubble

How homebreaks are driving housing prices in Santa Cruz

In Santa Cruz, proximity to spots like this one is more important than any other factor. Photo: Craig

In Santa Cruz, proximity to spots like this one is more important than any other factor. Photo: Craig

This feature originally appeared in our “Crowd Control” issue, in which we attempted to solve surfing’s overpopulation issues. It was a noble effort, but so far hard evidence suggests we didn’t solve the problem. This is Part 4 of 4 of our Crowd Control series.

Walking along the bluffs overlooking Pleasure Point in Santa Cruz, Jason Scorse paused in front of a squat, gray ranch house perched near the cliff edge to examine a realtor's picket in the front yard. "How much do you think this is selling for?" Scorse asked. His friend guessed $1.75 million. Scorse ventured it would go for $2 million. The friend punched the realtor's website into his phone. The 3-bedroom, 3-bathroom, one-story home was listed at $4.3 million. "Holy crap!" Scorse said. "See, this is exactly what I'm talking about."

It's no secret that ocean views drive up real estate values or that living within walking distance of a popular beach is a major home asset. But Pleasure Point isn't a beach. The nearest traditional beach--the kind with umbrellas, volleyball nets, and dogs--is miles away. A brief description of the home listing notes that the home has "wrap-around views of surf break" and mentions The Hook, the Point's premier break, by name.

"That's intentional," says George Wilson, the realtor handling the ranch house. In the past year or so, prospective buyers have been inquiring about the surf conditions at breaks near homes along the coast, Wilson says. In a community where everyone is relatively close to the water, and the earliest surfers to the break catch the most waves, nuances are important. All beaches are not valued equally, and Wilson has taken to trading on the allure of surfing.

"Any house around here with a view can look straight out across the water," Wilson says. "But more and more I'm talking to people who want to be close to the action."

Is surfing driving the prices of theses home so high? Scorse, an environmental economics professor at the Monterey Institute of International Studies, argues that the price is tied directly to the surf break and surfing's increasing popularity. By evaluating homes in Santa Cruz County by their distances from surfable waves and from beaches without surf, Scorse found a six-figure price advantage for homes near surf spots. The sport has grown to the point where people are willing to shell out big bucks for a leg up on beating the crowds to the break, Scorse says. His findings suggest that a quality wave could be as important to boosting home prices as quality public schools, low crime rates, and clean air.

"We know that natural resources are capitalized into property values and that people pay millions of dollars for ocean views and being near open space and wildlife," Scorse says. "My thought is, let's add surfing to that mix. This isn't rocket science. It's economics."

Latte in hand, Scorse strolled down a block of beach bungalows, Italianates, and stick-style houses on 41st Avenue in Santa Cruz, killing time before an appointment to view a home for sale in Live Oak, just east of the city. Despite working 40 miles south in Monterey, where the weather is similar and housing is cheaper, Scorse isn't thinking about buying a home there. Originally from New York City, Scorse settled down in Santa Cruz in 1996, after earning his PhD in environmental economics from UC Berkeley. These days, he lives about five miles from Pleasure Point, his regular surf spot, and commutes to work each day.

"I pay to live here, partially because of the surf," he says. To economists, real estate is the indicator closest to perfect economic value. Much of the things that matter most to people--health, safety, independence, recreation--are capitalized into the real estate market. "When I started thinking about buying a house it became this open question of whether that premium of being close, being able to walk out of your front door, grab your board and hit the beach, is worth money to people," Scorse says.

No one in Santa Cruz debates that the region's economy and culture are deeply rooted in its surf breaks. Surfers around the world come to experience the legend and lore of Northern California, to paddle out at Pleasure Point and Steamer Lane. It's home to wetsuit pioneer Jack O'Neill and the eponymous O'Neill Coldwater Classic. There are dozens of surf shops around the city. The mayor, Hilary Bryant, is an avid surfer. Riding waves, she says, is "a defining part of our identity."

It's against that cultural backdrop that Scorse poses his hypothetical question: "What if we woke up tomorrow morning and the surf here was gone? Would real estate be worth the same?"

Ironically, great surf spots both attract surfers and increase housing prices to the point that few surfers can afford to live there. Yadin Nicol, not far from home at Salt Creek. Photo: Matthews

Ironically, great surf spots both attract surfers and increase housing prices to the point that few surfers can afford to live there. Yadin Nicol, not far from home at Salt Creek. Photo: Matthews

The short answer is, of course, no. To discover the difference, down to the dollar, Scorse conducted a statistical analysis of home prices in Santa Cruz County. Relying on a local realtor's home data for 2011, he and two of his graduate students, Amanda Sackett and Frank Reynolds III, drilled down into 357 houses spread across three distinct neighborhoods: Seabright (78 homes), Pleasure Point-Opal Cliffs (122), and Rio Del Mar (157).

By controlling for value indicators like ocean views, lot size, home age, numbers of bedrooms and bathrooms, proximity to schools, parks, and commercial districts, Scorse shows that living near good surf is correlated with higher home values. Seabright and Rio Del Mar were built around sizeable sandy beaches with small waves; they're ideal for swimming but not for surfing. Pleasure Point-Opal Cliffs, on the other hand, is purely a surfing destination.

Scorse found that, on average, a home in Pleasure Point-Opal Cliffs within walking distance of a quality break is worth $106,000 more than an equivalent home in either of the other neighborhoods.

"Statistically speaking...that's pretty damn significant," Scorse says.

There's no surfing calculator or web application that will tell you what proportion of your home worth is tied to the waves at The Hook. Anecdotally, Scorse says he has noticed a reduction in surfing's impact on home prices the further from the beach a home is located. His conclusion: People are willing to pay not to have to get into their cars and drive to the spot.

"For this six-figure premium to exist, there is a significant number of people who are going to choose Santa Cruz over, say, San Louis Obispo so that they can be near a surf spot, as opposed to just the beach," Scorse says. "The message is that people who care about surfing pay a lot of money for it. Surf money isn't just in the local surf shop and pizza joint. It's in all these homes."

So will home prices continue to rise exponentially as surfing continues to gain popularity? Scorse predicts an eventual tipping of the scales, a time when the waves can't support the growing crowds, when surfers will paddle on to other breaks and drive up the prices in a new location.

"Theoretically, surfing here will reach a point at which it gets so crowded that people will leave," Scorse says. Surfers with higher incomes will price out surfers with less money. "We are already on that path. The demand is there. People love surfing. I hate to say it, but there's no going back."

--Gregory Thomas