Has The Rental Market bottomed?

 SFGate reports that San Francisco rents may have finally hit bottom.  The rental market may be reflecting the action in the recent Game Stop trading.  Never try to catch a falling knife in stock trading, which begs the question, what does one apply to property rentals?  Apartment List shows that rents fell just .4%, while Zumper is reporting prices actually rose .8%.  After monumental declines of 25% and 27%, depending on which service you wish to follow, even a minimal loss or gain is noteworthy.

It questions the point of who will be the parties renting?  The techies have departed from the Bay Area to parts unknown, whether it be to Hawaii or parts east of the Bay Area or even out of state.  After the rise in unemployment benefits, checks from the US treasury, matched with renter relief from the State of California, the poor souls who lost their homes or apartments to soaring rents replaced by Techies coming to Facebook, Google, Yelp and the like, have the opportunity to come back home.  That could be an easy way for Governor Newsom to get relief from one thorn in his side, that being Affordable Housing.  Newsom has his share of problems that do not seem to diminish.  Oracle has departed with Charles Schwab and HP to Texas.  Oracle has put up for sale the entire Redwood Shores complex.  Yelp has now put up for lease its building at 140 New Montgomery.  I do not think that will distract you from imagining the impact on the rental market.

As for Rent Relief, California aims to pay off 80% of most unpaid rent, as long as the landlord forgives the other 20%.  The state will need more taxes to pay off this benefit.  It is not hard to imagine why the corporations are leaving.  Having a new administration telegraphing higher corporate taxes is enough without higher state taxes to boot.

While residential rents are starting to look like they are on hold, the commercial market is on the ropes!  The upscale boutique hotel Park James in Menlo Park is now in default.  Park James is not any better or worse off than most of the commercial markets in the United States.  The members of Reddit, who lit the fire under the Game Stop rocket, had promoted short covering in some of the Commercial REITS.  As an example, Tanger Factory Outlets has a short interest ratio of 52.41%.  If no one is going to shopping centers, how are the owners paying dividends and making loan payments?  Sounds like the investment professionals have a good target to profit by; or at least until the US Government and State of California try to bail them out too!

Silicon Valley’s grip on venture capital seems to be slipping.  This year, predictive analysts at the private equity research firm PitchBook, say venture capital will drop below 20% for the first time in their dataset, which stretches back to 2006.  The immediate culprit is the pandemic, says PitchBook analyst Kyle Stanford. Lockdown orders have allowed investors and tech workers to flee the Bay Area’s pricey homes in favor of other cities where they can work remotely at a lower rent and or lower purchase prices. The shift is demonstrating that startups and venture capitalists can cut deals even when they do not meet face-to-face, removing one of the rationales for piling into Silicon Valley’s overpriced real estate market in the first place.  LinkedIn data suggests smaller cities have been the biggest beneficiaries of this redistribution of the US tech scene during the pandemic. The professional networking site collected location data from the profiles of American tech workers to find out which cities got the biggest windfall of workers in 2020. The winners were midsize cities like Madison, Wisconsin, Cleveland, Ohio, and Sacramento, California.

Zillow, as per my last missive, had predicted a 10-11% increase in Silicon Valley residential real estate for 2021.  So far, all I see is those forecasts are slowly coming down to the 9-10% level.  Not to say that is bad.  As we go into 2021, the economy and the strength of Silicon Valley will come from its industry.  With its industry moving to Texas and other states of low to no income tax, it makes it hard for me to imagine an increase in prices.  In fact, as I discuss this situation with title company personnel, I receive information that business being good by home prices not improving and areas of sporadic multiple offers are only in Palo Alto and San Carlos.  The growth that Zillow is now predicting is on a national level.  Which, to me, is quite reasonable.  As people move to less costly locales, home prices increase.  To the locales they leave, home prices remain the same, at best! The cost of living in California or the Bay Area is now stable but only due to low interest rates, should interest rates increase by 1% and home buying power reduced by 12%.  So far, the 10-year government rate hovers around 1.1%.  Now we get to the real long-term issue: higher interest rates.  As the State and Federal Governments raise taxes and raise debt, the result is to create demand for money and with that, higher interest rates.

Does that mean a CRASH?  Interest rates do not historically move like Game Stop!  It is a slow, gradual increase and decrease with a trend up, like boiling a frog alive.  It takes time for the water to heat to a boil and the frog becomes "frog's legs".  Many Silicon Valley residents are calling for a housing bubble and crash.  Not possible now.  If that is the thought then forget about having a job.  What is more probable is that housing prices remain static.  No increases or decreases.  Just flat for years. Then the owners of residential real estate could prosper from mortgage amortization!  As mortgage payments are made, the balance on the mortgage decreases and so the equity increases.  No concerns of “should we sell?” More so, buy, as the investment you have in your property increases through the gradual payment of mortgages and the gradual increase in equity value.

 

Newsletter January 24, 2021

 In my last edition, Zillow estimated a 10% increase in home values for 2021. These will come from inflation. Near the end of 2020, lumber prices increased due to the lack of production thanks to the Coronavirus.  Several large lumber mills in the U.S. came to a halt.  Home builders suffered the consequences.  Pressure treated wood prices increased 79%, dimensional lumber 73%, plywood 59%, decking 60%.  Along with these specific items all associated building products increased.  It was not usual for new home prices in the U.S. to increase $90,000 as a result of rising lumber costs.

 

The other issue for rising lumber prices was the tariffs with Canada.  Our domestic market cannot supply all our needs so our partner in Canada is relied upon to pick up the difference.

 

Next, we had wildfires on the west coast.  Our proud Redwoods stood the challenge, but the pines and other trees relied upon for construction became smoke and ash.

 

The small home builders and contractors have had a harder time.  The large builders, owing to their planned inventory, are feeling less of an impact.  Even so, by the end of the year, the inventories began to diminish and prices for the larger firms began to rise.

 

To understand the impact, the average sales price of a new single family home sold in September 2020 was $403,900 up from $384,000 in January 2020. Homeowners who planned to sell and buy new homes went back to remodeling, thereby putting pressure on the already tight inventory of resale homes. To those who were priced out, the only alternative was to fight for a resale home in the tight inventory market. 

 

There appears to be a light at the end of the tunnel as Chief Economist for the National Association of Realtors says that prices in lumber should moderate to decline sometime in 2021 as a result of more harvesting and lower tariffs.

 

Low corn production has affected meat prices.  Ranchers, to offset the high cost of grain needed to fatten beef for slaughter have gone back to the old days of the "wild west" and once again range feed cattle.  Probably better for us as this means less fat than the feed lots fattening process of corn. This means we will see inflationary prices coming to us in higher beef, lumber and, of course, gasoline prices, as corn is used as an additive.

 

The 10% increase in Zillow from the last newsletter may really be more of an inflationary impact.

 

“For those who have moved to the suburbs and beyond, moving back to the city full time is unlikely while the work from home trend remains. Many of these affluent homeowners are now making their secondary properties their primary residences for the foreseeable future. Although it is important to understand, for cities that are not densely built up or offer communities that have larger properties with yards and green space, it is predicted that these will remain or become popular again with the affluent who are not willing or wanting to leave their metropolitan lifestyle.” *Luxury Home Market Report January 2021

 

I couldn't let this missive end without a mention of a certain New York Times article entitled, "You start to feel stupid”: Tech workers can't leave SF fast enough.

The article does not bring up anything new from my past posts.  Maybe, with the exception of Estonia having a new residency program for digital nomads...ESTONIA!!!?  The next revelation is Savannah, Georgia and their reimbursement program for remote works.  But the mosquitoes may eat you alive!

Larry Ellison has put up for sale 301 and 401 Parkway and the 501 Island Parkway parking structure.  The office buildings are located within the Belmont City Limits and the parking garage is in Redwood City.  Goode Bye Tax Base.  Hello Redwood Shores property listings.  Get your cowboy boots and hats ready Partner!

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