Rising Interest Rates and Rising Stock Market Do Not Compute!

 Do we need a "wake up call"?  Since the beginning of the year to present, interest rates on 10-year US Government Bonds have risen 3/4%, give or take a few basis points or so (100 basis point equal 1 % point). 

 SO WHAT? Well the current yield of the 10-year T-bond is the rate mortgages are based upon.  Rising rates also are one of the measurements that banks and mortgage lenders use to determine their willingness to make loans either for their portfolio or to sell in the open market.  Once mortgage originators find an unwillingness to buy mortgages, interest rates must rise to make the buyers willing to take on the potential of higher rates.  The Federal Reserve has been the buyer of last resort that has kept interest rates down.  The FED has failed to stop the dramatic rise in rates. The FED has not accelerated its buying of mortgages in the after market.  Pension funds and investment companies who are the normal sources of buyers of mortgages have been reluctant to buy mortgages.  This is especially the case in Jumbo Mortgages a dominant type of mortgages in the Bay Area.  

In the past 30 days, home buyers have been frustrated with Pre-qualification letters and stated rates changing.  Buyers are being forced to look at lower lending limits and higher interest rates.  This  has had the effect of forcing the buyers to either raise their cash deposit or down size their buying appetite in a new home, or lowering the offering price on their new home under loan contingency clauses in purchase offers.

Lower offering prices translate into lower prices for future listings.  That seems to be a non event in our area.

Why?  Thank the Initial Public Offer Market and the creation of SPAC, Special Purpose Acquisition Companies.  The SPAC can buy private companies eliminating the IPO and creating a new set of mega wealthy employees.  As with the IPO's the new wealth has been translated into greater wealth in the after market shares have taken prices to levels that the new companies out price the market value of companies that are seasoned and related to the same industry of the new company.

The rush into going public has made many Techies rich.  There has never been a case that the new wealth has not stopped the desire for a "Trophy Home".  That desire has created a new source of buyers.  Contractors and real estate agents today have gotten into the game of finding fixer-upper and dated homes in areas like Menlo Park, Palo Alto, Los Altos and related high end markets to knock them down and reoffer the new homes at $4-5 million where once a $1.7-2 million home once stood.  

This time, the newly wealthy techie is not going on a buying splurge to the degree their predecessors did.  They have adapted. 

Suburban homes and schooling have become their goals for their newly found wealth.  Mobile workforces have given a new living destination and living standards.

CANARY IN THE COAL MINE:  during the time of the industrial revolution when the United States and Europe where in the throes of expansion and growth, coal was the source of energy.  Coal mines were below ground, generally, and light was generated by kerosene lamps, or a related power source.  As they dug deeper the gases underground were both toxic and flammable, but initially undetectable to the human nose.  The danger was the gases were unnoticed until it was too late and death and an explosion occurred.  To solve the potential danger a canary was placed in a cage.  The "Early Warning System" of the mid 19th Century and forward.  When the Canary Died Get Out!!

Today's Canary in the Coal mine is rising interest rates and rising equity prices, which include home prices.  Homes are the unique item.  Home are like stock markets in rotation  Recently the major change in equities have been from growth stocks and tech stocks to basic industries.  A big shift will occur on Monday March 15 when index fund changes are forecasted to remove growth and replace them with basic industries.  So too is the shift from tightly congested cities and urban areas to small town and suburban communities where homes are larger, lots are larger communities safer and schools are better and the homes are cheaper.  The rising interest rates which will put a damper on buying the Menlo Park, Atherton. Los Altos or Palo Alto home will find buyers moving to El Dorado Hills, Loomis, Granite Bay and other Greater Sacramento area communities that are substantially lower priced with greater sized homes and lots with equal or better schools.  

The rising rates have been created by the perception that the end of the Pandemic and the the return us back to normal, pre pandemic times.  

The ability to work from home has changed the needs and desires of families. 

Rising rates have also affected by the government funding of multi trillion dollar budget items to help Americans cope and get out of the Pandemic fed economic crisis.  The budget from this funding comes from US Government Bond sales.  More bonds sold, higher interest rates.  Higher interest rates mean inflation, all which add to an affordability issue in homes.  Affordability that has only become more stressful and has been in existence for decades in the Bay Area.

Taxes will fund the spending and repay the extra debt load.  Whether it is property taxes, income taxes or sales taxes, the movement of populations made more flexible with a mobile workforce will accelerate the socio-economic movement of populations.  This will especially be the case in the Bay Area.

There was once a saying of "Go West Young Man", will now be "Go East Bay Area Resident".  Now the question is, who will go east?  The renters will go.  Looking at the weekend real estate section of the San Jose Mercury News there is a section where all California Counties are measured in population size, education, income and renters versus owners.  San Mateo and Santa Clara Counties are pretty equal in renters versus owners . Some 48% rent to 52% own.  A renter can buy in Loomis California a 5-6 bedroom 7000 SF house on 3 or so acres, swimming pool and solar system for $2,200,000.  The monthly payment is $7,660 with a 30 year 3.25% loan no points, 20% down.  Just about the same rent as a substantially smaller home and lot size of a 4 bedroom Menlo Park home.

2020 MADE HISTORY IN MORE WAYS THAN ONE!

 2020 was indisputably a year for the real estate history books!  The onset of the global pandemic in a year of stops and starts.  It led to a shift in how we conduct our personal and professional lives.  The navigation through the pandemic witnessed a social and cultural movement that restructured societies, how we conduct business, adjusted to online learning and experienced a shift from large urban centers to rural small communities.

The housing market went from cold to hot as the average price of existing home rose on a U.S. average.  It was not necessarily the once hot cities and urban hot spots that dominated.  The resiliency of the real estate industry was one of the biggest surprises of the year.  The large scale shift to working from home created a shift from homes close to work to locations that did not require commuting.  Families sought out more spacious properties to achieve a better work-life balance.  

The home migration created a hot market outside of the once hot urban cities and towns that were once in proximity to work and transportation.  

eXp Realty is a good example.  I now get up every morning go to the Elks Club at 7 AM and work out on weights one day and bike on the other.  I am home to have coffee, check my emails and texts, attend conference calls to eXp World, our private web service, read the newspaper all without changing from my workout outfit.  Sometimes I work on offers, contact sellers and buyers while I review the paper and my popular news websites.  Oh yes, how is EXPI doing? Up again!  It pays to be a shareholder in the broker I have my license with. 

Then it is into the shower, shave, brush my teeth take my meds and back to the desk.  Of course once I pass the 1 pm timeline a quick bowl of yogurt and coffee. eXp has offered so much to adapt to the new way of living and working with their private website and service.  A Zoom call from our regional people to give the current update on our current market.  A great time to get an overview of where people are moving to and get an insight to helping buyers looking for affordability and the new life style.

As an example the knowledge of the movement of buyers out of the Bay Area is not a new issue that the media has discovered.  It has been going on since the pandemic started in January 2020 when the first Tech company said "work from home"!  Whether it is the conservative leaving liberal Facebook, or the founders of Silicon Valley moving their headquarters from Redwood City, Palo Alto or elsewhere in the Bay Area.  With the regional movement rents are plummeting and the crisis could get worse say Gabrielle Cannon of Yahoo News.

Texas and Mississippi lift ALL their COVID restrictions: Both states to end their mask mandates and allow businesses to fully reopen

With this happening how will the markets adjust?  Will California ever get off the restrictions as other states reopen, or will this just accelerate the movement to an open society out of California.

Talking about an Open Society, I have been showing properties in Granite Bay and Loomis to Bay Area Buyers.  The gyms have opened and have been open while we have been shut down.  

Here are some of the opportunities in Loomis and Granite Bay, just 2 hours away.

GRANITE BAY:

9049 STOCKHORSE LANE

"Majestic Estate in the heart of Granite Bay inside it's own private gate on 2.4 Acres. This Entertainer's dream is over 6,500 Sq.Ft that includes the house and the guest house. It has 5 car garages/ 2 RV parking garages 32' wide by 50' deep, two Boat parking garages. The main house is 5,302 Sq.Ft that has at the main floor a remodeled master suite, 3 Kids Bedrooms and In-law suite that has a family room and a separate Kitchen. on the second floor entertainment room with pool table and movie theater. The Gourmet kitchen is on the main floor and it has top of the line appliances. So many features in this house including sunroom, Wine cellar, Pool, Spa, outdoor kitchen/bbq with large bar seating, Basketball court, Soccer field, Kids Playground and owned 20KW Solar System. The separate guest house is 1,200 Sq.Ft of living space with 2 offices,bedroom, full bathroom, family room with bar and GYM. No HOA.walking distance to Award winning Granite Bay school. 5 minutes drive to the lake." SOLD $2,595,000

5900 OAK CREEK PLACE

"Luxury and Serenity describes this one of a kind Mediterranean style villa on 3.5 ac in the heart of Granite Bay. Features 7,463 sqft, 6 bdrm-suites, 8 bth, a Chef's kitchen with cathedral ceilings, big prep-island, breakfast nook, premium appliances. Most rooms with large windows, high ceilings, and Tuscan-milled wood finishes. Hallways have arched ceilings and doorways. Private office with wall credenza, barrel ceiling. Underground wine cellar with arched ceiling. All bdrm windows with a unique view of gardens and lush grounds. The pool has a spa, outdoor kitchen, and fireplace. Four car garage with wall storage and outside parking. Landscaping with a tranquil flow, moving water, pretty flowers, imported trees, and secluded areas to step away. The large grass area is perfect for family gatherings or as a horse pasture. Upscale, Exceptional, Private. Folsom Lake and Granite Bay Golf Club close by. Adjacent 2.4-acre property may be sold. Call for details. Some images virtually staged." SOLD $2,525,000 6005 VIA ALICANTE "Welcome to the palace, the crown jewel of granite bay.Located behind it's own private gate inside prestigious Los Lagos Gated community, Over 9000 Sq.Ft Estate with Custom touches throughout the house, natural stones, cathedral ceilings, crystal chandeliers, formal living , formal dining room, high ceiling, spacious great room with wet bar, gourmet chef kitchen, top of the line appliances and large island and luxurious custom paint and blinds throughout the house. 6 bedroom 8 baths including 2 master suites, secondary in-law kitchen with top of the line appliances and custom granite counter tops and separate secondary family room downstairs. Entertainers dream backyard with multiple sitting areas, Pool & spa two built in BBQ, outside kitchen, pizza oven, firepit, playground, and so much more. Enjoy Los Lagos tennis courts and walking trails to Folsom lake from inside gated Los Lagos." SOLD $2,500,000

LOOMIS:

6265 INDIAN SPRINGS ROAD

"Paradise awaits outside this fabulous estate on over 9.5 acres in a great central Loomis location. This resort like property includes a pool with waterfall, large covered outdoor kitchen and fireplace, over 2000sf custom putting green with sand traps, basketball court, sand play ground and in-ground trampoline. Multiple year round ponds with a large stocked fishing pond and dock. Vineyard including Cabernet and Merlot vines. Large shop with pull through RV storage and hookups. The main floor of this almost 6000sf home lives like a single story, featuring 5 bedrooms, 4 baths, sauna, exercise room/home office. The lower level of the home has a large bonus room with separate in-law quarters with its own private entrance. This stunning estate is an entertainers dream. Established short term rental with great cash flow. Contact agent for profit spreadsheet."  SOLD $2,185,000

4233 FAIRWAY VIEW DRIVE

"If you're looking for a large custom home on acreage in a private gated community without a

 $2M+ price tag; HERE IT IS! Nestled inside a small gated community, this 5 bedroom, 4.5 bath, nearly 6,000 sq. ft. home is loaded with amenities of the finest custom homes but priced significantly below them. Huge gourmet kitchen with furniture style cabinets, high-end appliances & tons of counter space. Home office has a built-in 300 gallon saltwater aquarium. Game room with wet bar, mini fridge & d/w drawer. Home theatre with seating for 7. Downstairs bed & bath. Heated pool & spa with waterfall, koi pond, fire pit. 2,100 sq. ft. finished garage can hold up to 7 cars. Add some lifts and store up to 6 more. The 6+ acre lot with year round creek allows plenty of room for your animals, an additional garage or even in-law quarters. All of this in the rural community of Loomis with its renowned schools of H. Clarke Powers and Del Oro HS, yet minutes to shopping, restaurants & theatre." SOLD $1,700,000

AND FOR THOSE LOOKING FOR WOODSIDE AT ONE TENTH THE PRICE!

4264 LAIRD ROAD

"Amazing home in the heart of Loomis! Enjoy country living yet still have the conveniences of being close to town. This property boasts 4.7 useable acres, 25x40 metal shed/shop, pond, white country fencing, and priceless views!! The home offers 4 bedrooms, 2.5 bathrooms! Formal living and dining with separate family room make this floorplan perfect for all buyers! Open kitchen offers abundant storage, granite counters, and an eat in breakfast nook. Master suite upstairs with dual closets and walk in shower. Fantastic outdoor living with mature landscape, spacious pastures perfect for animals, and plenty of space for a garden! This property provides endless opportunity! Located in the very desirable Loomis Unified School District! Truly the perfect place to call home!!"  SOLD $880,000!  NO NOT $ 8 MILLION!

On my recent Zoom area meeting I heard agents complain that they are being out bid by Bay Area Buyers and the market there is up 11% for 2020. Listed $650,000..sold $690,000 cash!  Geez, that is +30 years ago in the Bay Area.

PICK UP THE PHONE AND GIVE ME A CALL AND WE CAN MAKE A TOUR!  650-743-7249,    gary@mckaeproperties.com

Leaving the Bay Area

There is and has been a constant movement of residents from the Bay Area.  Few have realised that the movement has not been predominantly out of state.  The movement has been to areas in California that provide Affordability, Good Schools, Lower Cost of Living and larger and less expensive homes.

Rents have collapsed at spectacular rates, with San Francisco leading the race down.  To those who have rented solely for the night life and commuting to work it has ended with COVID 19.  The cramped conditions of apartments with no night life has taken the glamour out of "nightlife".  

The one and two bedroom starter homes too have become an upgraded solitary confinement quarters; irrespective of, the ability to walk around a 6000 square feet lot occupied by a 1350 square foot home with attached garage.

When those who decide to look for a larger home in a community with safety and good schools they are faced with:

A recently sold West Menlo, "elegant and artistic...modern mission inspired home"  5-bedrooms, 3 1/2 bath 3,647 square foot home on a 12,217 square foot lot. Sold $4,390,000

The simple solution is to look east and find affordability, workability 2 hours from the Bay Area.

Loomis California some 2 hours and 10 minutes away, "Stunning Saint Francis Estate with 4 Bedrooms, 3 full Bathrooms spanning over 3,000 square feet with designer hardwood floors, custom imperfect texturing, and large windows welcoming plenty of natural light. The custom kitchen great room concept features sleek black granite counters, subway tile backsplash, custom cabinets, stainless Kitchen Aid appliances, gas cooktop, built in fridge, double oven, and walk in pantry. There is a breakfast nook and bar, family room with custom built-ins, wine fridge, and cozy fireplace. The home also features a formal dining room and living room perfect for dinner parties and entertaining. All the bedrooms offer great space especially the master on-suite with fireplace and large bath with a soaking tub, large shower enclosure, quartz counters, and refinished cabinets. The 1.2 acre lot features a built-in pool, fire fixtures, fire pit, jacuzzi, and outdoor cabana kitchen." (per MLS) SOLD $1,340,000!

Then there is Granite Bay just a few miles west of Loomis there was a recently sold +Luxury and Serenity describes this one of a kind Mediterranean style villa on 3.5 ac in the heart of Granite Bay. Features 7,463 sqft, 6 bdrm-suites, 8 bth, a Chef's kitchen with cathedral ceilings, big prep-island, breakfast nook, premium appliances. Most rooms with large windows, high ceilings, and Tuscan-milled wood finishes. Hallways have arched ceilings and doorways. Private office with wall credenza, barrel ceiling. Underground wine cellar with arched ceiling. All bdrm windows with a unique view of gardens and lush grounds. The pool has a spa, outdoor kitchen, and fireplace. Four car garage with wall storage and outside parking. Landscaping with a tranquil flow, moving water, pretty flowers, imported trees, and secluded areas to step away. The large grass area is perfect for family gatherings or as a horse pasture. Upscale, Exceptional, Private. Folsom Lake and Granite Bay Golf Club close by." (Per MLS)  Sold for $2,525,000!

CALL OR TEXT 650-743-7249, OR EMAIL GARY.MCKAE@EXPREALTY FOR ACTIVE LISTINGS.

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.