What is Next for the Bay Area's Housing Market?

Prior to 2020 Bay Area exodus really did not prove to be a fact.  Some 3% of the population moved prior to 2020  While many talked the story about moving for various reasons.  The climate, job opportunities far outweighed the cost of living. (More to follow)

March 2020 the Pandemic created many changes in housing.  The ability to work from home created an attitude of staying in the Bay Area.  The first attitude to be affected was the rental market.  Rents in San Francisco plummeted.  The move helped areas outside the Bay Area to see demand and increases in home prices.  Besides San Francisco San Jose dropped in rental prices as did other communities within the Peninsula.  The result was not in the lower income housing rental.  They remained the same as the ability to move severely restricted an exodus as the ability to find work anew made the lower income families to stay put.

What has resulted was the decline in the luxury end of the market.  Laurence Du Sault in the January 15, 2021 article from the Bay Area News Group wrote of the deals that abounded in the Luxury Rental market.  "Three months free rent on a 2-bedroom apartment with a pool in West San Jose.  A Lake Merritt studio in Oakland at a 50% discount for the first six months.  Two months of "complementary rent plus a $2000 Mastercard gift card on a Luxury High rise renting for $4375 per month in San Francisco's Potrero Hill neighborhood".  Another deal is a Russian Hill apartment with two months free rent and no security deposit.

Since March 2020 rents in San Francisco dropped 26.7%, Santa Clara County rents declined 17.8% and in Oakland down 14.2%.

A rental market as beaten up as this one certainly gives thought to bottom must be near.  It also bears watching if the exodus to other areas in the State of California and outside states stop with it. 

As the Luxury Market rental market has taken hits, the Affordable Housing market has not seen any weakness; in fact, it seems as strong as it has always been.

So where did all the renters go?  By this time in 2020 the real estate market was looking to be a bright year ahead.  It turned out to be a good year in the Bay Area Housing Market.  Buyers sought more space, especially private space.  Single family homes in the suburbs soared!  San Mateo County was the only county that the average home price decline 3% for 2020.  Experts are now seeing more demand for single family homes as rents decline and renters seek the home that can provide mobile work space with lovely backyards for Zoom calls.

Still thinking of leaving?  What are the best states to move to?

Jonathan Lansner of the Southern California New Group put a list together.  

He looked  at Cost of Living: Housing, Services, Goods.  No surprise California was the priciest place to live.  He looked at Opportunity and created a bottom line of what is the paycheck worth?  California came in second: Massachusetts #1, California #2, New York #3, Washington #4, Connecticut #5 and New Hampshire #6.  California's high grade is why 97% of residents did not move from 2017-2019.

Here is Jonathan's scorecard ot the Top 10 states to move to.

1. Texas, 2. Arizona, 3. Washington State, 4. Nevada, 5. Oregon, 6. Florida, 7. Colorado, 8. New York, 9. Idaho, 10. North Carolina.

Now before you call U-Haul and book your move here is what the future looks like in 2021.

Proposition 19 with all the negative commentary over the inherited values lost to heirs really provided a big help to a majority of tax savings for Seniors and Disabled home owners.  No matter where they move in California they take their tax base with them, no matter how much they pay for their new home! So if you are considering moving look elsewhere in the state; and as of April 1, 2021 your tax base goes with you.  Talk to your tax man, determine the new tax base in the county you are moving to and determine your savings.  This could be a better alternative than moving out of state.

In closing, the ability to have a new low interest rate mortgage now may only be a small window of opportunity.  The Federal Reserve "constant maturity",  yield of the 10- year bond  versus the Freddie Mac average 30-year fixed is flashing an aberration.  The recent 10-year surge to over 1% did not increase mortgage rates.  The mortgage bench mark fell to 2.65%, the 17th record low since the pandemic up ended the economy.  That is below the 2.88% rate when the 10-year bottomed in August.  This aberration emphasises to look to buy something in California.

Zillow is forecasting a yearly increase of 10.8% in zip code 94062, 10.2% increase in 94061, 11.8% increase in 94070, 10.3% increase in 94063, 12.1% increase in 95070, 10.8% increase in 95125, 9.7% increase in 94303, 9.9% increase in 94027, 11.8% increase in 94020, 9.7% increase in 94025, 10.2% in 94301, 10.2% in 96734, and 9.7% increase in 94065.

Buyers take note.  Low mortgage interest rates that are out of synch with the 10-year treasury bond and forecasts of higher home prices.  Presents a great opportunity!

Scientist are now saying the Winter Crisis for COVID 19 has crested and lower rates are forecasted.  The numbers all favor a return to normalcy and a strong real estate market in our Bay Area.

  

2021

 Bay area housing, the job market, and transportation could radically change in 2021.  Employers and white-collar workers have discovered the potential and savings from working remotely.

Early in the pandemic, I wrote of my observations of the change in the work status that was affecting the rental market.  Google, Twitter and Facebook decided upon some form of mobile working.  What the pandemic has provided is new efficiencies.

We all know about the corporations and the owner billionaires that have moved out of the State of California.  But, did you know that it has gone beyond technology?  Lawyers, accountants, and journalists and other professionals have discovered that working from home has rewards.

The shift is already putting stress on the finances of State and Local Governments.  Builders and investors in residential and office construction have joined the shift.  Office vacancy rates are expanding in the Peninsula.  Commercial properties, like residential, are moving east of the Bay Area and Peninsula to less costly areas.  They are following employees in the move to eastern areas of the state and out of state to lower cost areas.

Rental prices in San Francisco are down 23%, Oakland is down 20% and San Jose is down 15%.

Prices of condominiums have dropped and resale inventory has soared.  Urban dwellers have figured out they don't need to stay in a city to be close to work.

It doesn't take very many ultra-wealthy Americans changing their address to create havoc on local community finances.  For example, 80% of New York City's revenue comes from 17% of their population who earn more than $100,000 per year.  

The cost of a U-Haul from San Francisco to Austin is reported to cost five times as much as the cost of moving from Austin to San Francisco.

All of this information is in the papers and much of what I have quoted has come from the San Jose Mercury News.  

What is the outlook for 2021?

The decline in rents will surely stop once the exodus stops or lessens.  The source of the Peninsula's value comes from its educational facilities.  Stanford or Berkeley are fixed.   They will not relocate!  The source of capital that funds startups will remain in the area.  As rents come down and new capital funds new businesses, employees will once again return to a lower cost of living.

Expect other changes with the change to Democratic rule:

1. Under the Biden Plan elimination of the step up in basis for inherited properties and assets will change.  Under the current law, the federal income tax basis of an inherited property or asset is stepped up to fair market value as of the decedent's date of death.  So, if heirs sell the the capital gains will be based on the stepped up basis and the profit, if any, from the net gain.  This can be a huge tax savings for greatly appreciated inherited assets.  The Biden Plan would eliminate this tax savings provision.  

2.  The elimination of tax breaks under the proposed Biden Plan would (1) eliminate the $25,000 exemption from the passive loss rules for rental real estate losses incurred by middle-income individuals, (2) elimination of Section 1031 like-kind exchanges that allow deferral of capital gains taxes on swaps of appreciated real property, (3) the elimination of rules that allow faster depreciation write offs for certain real property, and (4) the elimination of qualified business income (QBI) deductions for profitable rental real estate activities.

3.  The Biden Plan would create new credits for home buyers and renters.  The Biden Plan would create up to $15,000 for eligible first-time homebuyers. The credit would be collected when a home is purchased; rather than, later at tax return filing time.  The Biden Plan would also establish a new refundable tax credit for low-income renters.  The credit would be intended to hold rent and utility payments to 30% of monthly income.

4.  Green energy tax changes are within the Biden Tax Plan.  Biden would reinstate or expand tax incentives intended to reduce carbon emissions; such as, deductions for emission reducing investments in residential and commercial buildings.  Credits will be restored for buying electric vehicles produced by manufacturers whose credits have been phased out under the current law.  The Biden Plan would also eliminate federal income tax deductions for oil and gas drilling costs and depletion.

Of course, the Biden Plan is only a plan until it is confirmed by Congress.  

The plan is only a plan but the concept is already being accepted in the stock market.  The control of the Senate by the Democrats puts credence in the Biden Plans success in Congress; either in whole or partially.  Interest rates will rise if implemented.  Inflation will rise if implemented.

Where do home prices go?  Zillow is forecasting 8-10% increase in values throughout the Peninsula communities.   Larger increases could be expected in areas beyond the peninsula and even within the peninsula.  The western hills of the valley are already seeing  prices escalate as buyers see the value of living in lower cost areas within easy access to the peninsula cities infrastructure, health facilities, entertainment, restaurants and shopping.

Part II California Plan to Tax Worldwide Wealth

"Welcome to the Hotel California, you can check out any time you like; but you cannot leave."  Remember that famous melody from The Eagles?

The California Assembly has put that into legislation. AB 2088 will create a "Wealth Tax" on residents and any person who stays in California longer than 60 days.  Then extends the tax for 10 years!  

This is certainly an answer to why Ellison and Musk moved to Hawaii and Texas.  In addition to these well known residents David Blumberg and Keith Rabois have left The Hotel California too!  DropBox and Splunk are on their way out the door. 

The list most likely will go on, but a "wealth tax"?   Of course, how else is California going to pay off their massive deficit and liabilities?  

But a Wealth Tax?  The California Constitution can most likely cover that on State Residents, but going across state border to attach to the wealth of citizen of other states and countries is likely to run afoul of the U.S. Constitution for U.S. citizens.  Of course you can forget about any country cooperating with the tax collection.  Then too, one must consider the collection apparatus and appraisal apparatus needed and necessary to calculate and collect the tax.

Each December 31 this tax would gather up a new crop of taxpayers for the decade.  

What happens to our well known and respected Universities?  Or the multi-million dollar homes?  The success of the knowledge created will stop at our borders as any graduate who goes onward to create wealth will find themselves on the tax role in California.  

The bill is estimated to create $7.5 Billion in additional revenue, YEARLY!  

Another proposal on the Assembly Floor is raising the maximum tax rate to 16.8% and raise another $6.8 billion, YEARLY!

California has enough financial woes for the entire nation.  Unfulfilled public pension promises, a vast social safety net so a Wealth Tax is the only way for politicians to stay in office and pay for the votes they bought.  It is the 1% that pay for 46% of the total California income tax.

Well, the argument is it is ONLY .4% on net worth over $30 million.  Mark Zuckerberg's first year tax would be about $400 million.  If he moved out of state the tax would extract $4 Billion.  If he remained in the state it would be ONLY $2 billion extra.  

Bill Gates home in Palm Springs would come into question.  Stay in California for 60 days and the tax would approximate $1 million.  If he stayed out of the state the tax would continue at a diminished rate for the next decade.  

At the moment there are no police roadblocks on the freeway trying to keep moving trucks from leaving California.  If it passes the state may need to consider placing Road Blocks and a fund to purchase all the large estates that will be liquidated.

BOLD PREDICTIONS FOR 2021 & CALIFORNIA PLAN TO TAX WORLDWIDE ASSETs

Proposition 19 and the Movement out of the State

November Luxury Market Report

Did you ever think you would find yourself reading an article on "Pandemic Real Estate Trends"?

This year has been full of surprises.  The Luxury Real Estate market is fortunate to have seen steady growth for 2020.

Rather than fall apart, the luxury real estate market quickly adapted to the situation.  There is now a clear pandemic real estate trend emerging.  The real estate pandemic market is evolving as it begins to reach a state of more certainty.

There is a new demographic group forming, "Trail Blazers".  Trail blazers, like our forefathers are choosing housing locations based upon family, health, lifestyle.  They adjust that to their business or work proximity.  These "trail blazers" are one of a group composed of: Explorers, New suburbanites and Resort buyers.

EXPLORERS: (Trail Blazers)

they tend to be younger than 39.  They are ready to seek adventure outside the big cities and suburbs.  They want to stretch their dollar and they value life experience over status.

Explorers are more open to rural, non-traditional luxury markets.  Markets were open space, better schools and family friendly entertainment are easy to find.

As buyer's Explorers are looking for a luxury market professional who understands their wants.  They want all their surroundings to support physical, mental and spiritual health.  Besides being under 39 they have a net worth of $1-5 million, and 40% have one child.

NEW SUBURBANITES:

This group includes professionals who may not have full work-from-home capabilities as entrepreneurs, business owners or senior management.  This means an occasional commute to their location office.

They tend to be older, 39-54, with net worths between $5-10 million.  They are married with two or more school aged children. They are likely to spend on luxury purchases like sports cars, boats, art and upscale health and wellness treatments.  They show their preference to showy luxury.

As buyer's they are looking for bigger, more comfortable version of what they already have. They are not looking to explore.  They want a home that is more comfortable for everyone in the family while they are in close quarters with each other during the "lock downs".

RESORT BUYERS:

This is the oldest group of the three.  The Resorters are ready to enjoy retirement in world-class vacation destinations.  Destinations where they can enjoy fresh air, recreation and luxury amenities; such as, skiing, wine, golf or yachting.

Their net worths of $10 million or more make it easier for them to make a choice of where to live.  They may own multiple properties and are looking for FREEDOM.

They also prioritise health and wellness, but sophistication and luxury are equal priorities, much more than the other two groups.  * taken from Institute of Luxury Real Estate Marketing, November 24, 2020.

This article makes sense when one tries to understand our market with sellers moving out of state or out of the area.  The transition is nothing more than the groups moving or transitioning within our area.

Welcome to the Twilight Zone

The Twilight Zone (marketed as Twilight Zone for its final two seasons) is an American anthology television series created and presented by Rod Serling, which ran for five seasons on CBS from 1959 to 1964.^[1] Each episode presents a stand-alone story in which characters find themselves dealing with often disturbing or unusual events, an experience described as entering "the Twilight Zone," often with a surprise ending and a moral. Although predominantly science-fiction, the show's paranormal and Kafkaesque events leaned the show towards fantasy and horror. The phrase “twilight zone,” inspired by the series, is used to describe surreal experiences. (Wikipedia)"

That, I think, aptly describes our situation regarding the current pandemic.  We have experienced disturbing and unusual events that have put us in a surreal state-of-mind.

Let us review these issues to date:

"California Love it and Leave it!" This was from an Opinion section of the Monday, November 11, 2020, Wall Street Journal.  It was written by Joe Lonsdale, a general partner at Venture Capital firm 8VC.  Joe grew up in Fremont, went to Stanford and spent most of his adult life in San Francisco and the Bay Area.  He decided to leave, citing the following reasons: California is in disrepair, has bad policies, discouraged businesses and innovation, public safety issues, ill-conceived justice reforms and radical district attorneys, electricity is a series of power outages equal to a Third World country, the lack of responsiveness to the pandemic, housing is full of restrictive zoning that makes it nearly impossible for many low and middle-income workers to live anywhere near major cities, the state is beholden to public-employee unions and spending is out of control, and a broken environmental review process that takes decades for lawyers to build anything.

Summing it up, Mr. Lonsdale has moved to Texas and states that the California Technology motto of "The Word is Broken, Let's Fix it" now applies to California.

WOW. We see much of what has been stated in my blogs, but from a person of authority and in a full article in the Wall Street Journal.

Mr. Lonsdale passed over the fact that back rent in California is nearing $1.7 billion.  Nearly 240,000 renter households have fallen behind in rent with the average per household at $6,953 per household. A study by UCLA and USC found that 80% of LA County tenants Homeowners have turned out better as they were allowed "forbearance programs" that added the missed payment to the end of their mortgages. paid their rent on time since the pandemic hit but were forced to rely on savings, credit cards, loans from family and friends to stay current.  California is calling out to the US Government for help.  That may be a useless call, as the Senate may not pass such a bailout.

The Exodus from the State of California has dropped 5.4%, the first since 2011.  Despite all the complaining about costs, crowds, and politics, Californians seem to be a stable bunch.  California did have the #1 count of residents who changed residence, both interstate and intrastate; those shifts translated into 88.7% of the population remaining in place.  Compared to the national average of 86.9%, Californians remained stable in their location of choice. More information can be found here: https://www.cnbc.com/2020/11/29/good-riddance-techs-flight-from-san-francisco-is-a-relief-to-some.html?__source=sharebar|email&par=sharebar

So where did the immigration go?  If out of state immigration has declined, the choice many seem to be to small towns and rural communities.  According to Louis Hansen of the Bay Area News Group, the pandemic lockdowns and months of remote work indicate that homebuyers are feverishly looking for properties in small towns and rural communities.

Interest in country life and small town homes more than tripled in October 2020 from the previous year.  Following the Coronavirus trend, big-city residents are looking for more space, and a cheaper and lower stress option for remote work according to Redfin.  

We live in one of the priciest areas in the U.S.  During the recent several months since the pandemic, areas like Atherton, Woodside, Portola Valley, Palo Alto and Menlo Park have seen homes sales change hands at seller-dominated markets in days on the market, but only after 10% price cuts.  Just a few minutes to hours’ drive from Silicon Valley, home prices have been rising to the extent that Lake Tahoe and neighboring rural areas, such as Pescadero, have approached record levels. An example of this shift is a sale of 180 acres in Pescadero for $5 million. The new owner feels that, if we are stuck in place, we’re going to have some land around us.

In June 2020, I put four parcels for sale in the Middleton Track, part of La Honda and on the edge of Portola State Park.  Three lots, 18 acres and wo 3 acres lots, and one 6-acre lot with two housing units, plans for a large home and back up water and power for $650,000.  Multiple offers in less than 30 days and 23 disclosure documents were requested.  The fires were all around the property in a much-protected forest the residents call the Asbestos forest. It sold for $650,000 and appraised at $1.25 million.  The owner would not listen to my recommendations on pricing and after retirement and commuting from LA, she just wanted out to travel.  This is a fortunate example of rural locations being targeted by buyers and their interests.

The Sunday, November 29, 2020, edition of the SF Chronicle Home Section supports "Where buyers can score big homes for less money" and Featured Homes in Santa Cruz and Sacramento.

Zillow will send out yearly estimates going forward.  They are going from 6-8% with the largest estimated gains in Aptos and La Honda.  Just substantiating the growth will go to the rural and small towns.