There is a Shift Happening

 Breakneck. That's the best way to describe the pace of the 2021 housing market. The bidding wars got so intense this year that home price growth set an all-time record.

The rush of buyers into the housing market during the pandemic absolutely crushed housing inventory—the number of homes on the market—with that figure falling for 12 consecutive months. By April, housing inventory was down a staggering 53% from a year earlier.

There has been a change.  Ever so slightly, but a change indeed.  Well at least that is so in the Nation.  Here in Silicon Valley inventory has declined.  

In February 2021 we started out with a 2-month inventory in Silicon Valley. Slowly it has dropped and leveled off at a 1-month inventory.  One would expect the law of supply and demand would keep prices moving upward.  Not so, in February 2021 the 6 city area average price went from $3,318,431 in February to $3,874,913 in June and dropped to $3,201,528 so far this month of August.

What's the story?  I have done some work in what is called Broker Price Opinions.  That is when a bank or financial institution want a broker to certify value for a loan.  When I looked at the comparatives I saw completely remodeled homes, interior and out with new landscaping.  The most notable were in East Palo Alto.  But they were elsewhere in the, what I call "bedroom communities" like Palo Alto, Menlo Park, Redwood City.

It was not hard to pick them out.  New lawns, landscaping, a new painted exterior.  To support the movement has been in our faces every day.  buy your home for cash, no fees, no contingencies.  eXp is doing it, Zillow started it, but we agents have been called on a regular basis from contractors and spec builder asking for a listing before it is put on MLS.  

The more spec players in this market place the less likely the desire to hold out for higher prices.  These players run super markets. They just want to move inventory off the shelves.  They will keep on until the inventory of sellers stop.  The more the players the slowly prices will decline as I just pointed out in the 3rd paragraph above.

There are two areas that this did not occur, Woodside and Portola Valley. The large estate properties with building departments who are not cooperative in flipping and quick approvals.  Building department staff to Architectural Review Boards of local residents and then to Planning Board of local residents.  All of which are volunteers.  All with the potential of movements of plans and permits back and forth from board to board before a final approval.

While Menlo or East Palo Alto may have plans and permits granted over the counter and homes go from 1940's or 50's to 2021 in 3-6 months.  Woodside and Portola Valley can take years.  It is not uncommon for plans and occupancy to go 3-4 years.  No spec builder wants to risk money on a long time frame.  It is far better to flip as many EPA homes as possible than risk a big play on Woodside or Portola Valley.  But still prices have had the same effect as owners; rather than, speculators fixed and sold at their leisure.  The simple task is, "if we don't sell it we live in it"

Where is this going to take us?  the Foreclosure Moratorium ends in September.  I have obtained my REO certification.  That means "Real Estate Owned" by banks and financial institutions.  

I stated that I was performing Broker Price Opinions, BPO's.  Not a big pay day.  It prepares for the paper work needed to work with bank inventory managers.  They all have a specific set of forms to prepare that gives them the information to move inventory.  The past experience of the agents who work this market is 2006 and the financial crisis.  Banks just want to clear inventory.  Those agents who knew the process got the listings.  I remember a friend having 75 REO's one year that averaged him $6000 per transaction.  That is $450,000! that meant the average price was $200,000.  Not your Woodside and Atherton homes just the homes that were once rentals or the working class that found themselves out of work.

Will that happen again?  Everything is great.  Prices are strong.  Buyers keep on coming to the market.  Silicon Valley businesses keep buying more land.  What could happen?

BLACK SWAN

Forbearance ends, the government enacted law to allow mortgages to accrue during the pandemic ends in September and October.  Will this be the beginning of inventory?  Will it only apply to FHA loans and low income borrowers?  By all calculations over 1 month of additional inventory will be added nationwide.  Will that be enough to add to pressure on price?  Of course, one needs to remember that the eviction moratorium end too!  People on the street and who will rent the empty units?  Government subsidy money has not been distributed and will that keep the eviction process in abated?

There are many questions that will be popping up as BLACK SWAN'S.  News media will be kept busy.

Silicon Valley has acted like Camelot, with its golden walls and moat surrounding an area protected from the troubles of economic crisis that spread nationally.  Will Evictions and Forbearance be the start of a long awaited stall in housing prices?

Time will only tell, but remember the house you buy is not a trading asset it is something you live in and bring your family up in and age in.

The Institute for Luxury Home Marketing July Monthly Report is out.  The Luxury Market has been a market on to itself.  While median price homes bounce to the tune of interest rates, unemployment and inventory, the Luxury Market stays above the clouds, so to speak, in demand and price.

The sales for luxury properties between January and June 2021 show steady growth, with demand significantly increasing in the spring and trending upwards in early summer.

At the start of 2021, experts predicted a strong luxury real estate market that built on the trends set in the second half of 2020. However, very few anticipated just how much impact buyer demand would still have on 2021’s spring market. 

Inventory levels have been rising since March 2021; as of the end of June there has been a 22.68% rise of luxury properties on the market, and the number of pending sales has also started to decrease. The realization that there is no immediate sign of a dramatic rise in mortgage rates, has enabled buyers to recognize that they do not need to feel the same sense of urgency as they felt in the spring.

Overall, even for hot markets, the expectation is, while the luxury housing market will still experience strong seller market conditions, the intensity of demand will continue to decrease and there will be a gradual but ongoing shift towards a more typical pace

COVID-19 created a huge focus on how homes are built and valued. As a result, there is now an expectation by the wealthy for an array of services to be integrated into their home, to help create balanced solutions that cater to their core needs of working, sleeping, playing, and eating. 

New designs have begun to pivot dramatically toward more integrated live/work/play balances, providing solutions for indoor/outdoor living. Design and functionality are focused on ensuring flex space, greater square footage, more outdoor space, extra rooms and secure, and fast data connectivity. Engineering features now include health functionality, such as air quality, ambient heat and cooling systems, water filtration, and technology driven management tools. 

Of equal importance are the demographic groups who are influencing both current and future trends. Millennials and Gen Z groups are entering the real estate market. Whether their wealth is entrepreneurial, or as a result of the great wealth transfer from their baby boomer relatives, or their investment in the stock market or crypto currency market – their impact on purchasing luxury properties will continue increase significantly. 

Baby boomers also remain a big influence on the luxury market – if they choose not to downsize or move to their retirement home, as they did during the previous 12 months, then this impacts the level of new inventory that typically comes on the market each year. 

The art of selling and buying in this market needs a critical and analytical approach, understanding the realities and setting expectations accordingly will ensure that goals are achieved. For homeowners looking to sell their luxury home in today’s market, working with a Realtor who can capitalize on the preferences of current investors is needed. 

California Real Estate Market Cooling

 While it's a shift of only 1-2 degrees, but the red-hot housing market is finally starting to cool.

Despite the median home price hitting yet another record high in May the year-to-year date statewide home sales dipped by 2.7% in May.  They had been rising steadily since February.  But, for the first time in 2021, the median number of days that a single-family home was on the market did not drip, but rather held steady at seven, the same number recorded in April.

John Graff, a Los a Angeles based broker and chief executive of Ashby & Graff said, "Buyers are getting fed up at this point with submitting as many as 8-12 offers and getting rejected."  "They're throwing up their hands at this point", said John.

The median price of a single family home in California hit $818,260 in May, an uptick of 1/2 % from the previous month.  It's an acceleration with a foot off the gas.  In April the median hit $814,000 up 7% crossing $800,000 for the first time in history.  Compare that to seven months ago at $700,000 and in May 2010 at $588,070.  Buyers are exhausted!

California Association of Brokers gave the median price increase on Ultra-luxury homes of +$1 million increasing 200% from May 2020.  

The most notable place of cooling was Los Angeles.  The talk of Bubble keeps popping up, but that is not the case when it is a simple slowing down in demand over excessive competition and over bidding to unrealistic numbers.

While the housing prices begin to slow their assent, the renters are facing eviction and those with back mortgage due are facing negotiations with servicing agents.  In Los Angeles County 7,677 were locked out of homes.  Eviction rates were higher in the inland empire and Los Angeles County.

Matching the eviction are the Mortgage Service companies bracing for a fallout as Covid Bailout ends.  An estimate 7.25 million borrowers have participated in forbearance programs.  This represents 14% of all home owners with mortgages.  At eXp Realty we are being trained and re-certified to handle REO properties.  That is Real Estate Owned by banks and financial institutions.  In the Sacramento area agents are already getting assignments of developer failed properties.  Locally I get Broker Price Opinions of investor private purchases off MLS.  The prices paid are really pushing the limit of what a home can sell for with improvement.  The over paying is quite significant.  Emails come into me regular with brokers and investors looking for listings not yet on the market.

To add to the issues of home values is the commercial market.  San Francisco office vacancy rate is at 20.1%.  San Francisco residential rental market is still down 20%.  It had a slight pop at the beginning of the year, but it failed to rally further.

According to Kelly Hwang of the SF Chronicle San Francisco's housing inventory went up in May 8.7% from April and 25.6% from this time last year.  

Bloomberg has stated that prospective home sellers who sat tight as the home prices climbed higher and faster are finally starting to cash out..  Bloomberg has stated their numbers show homes for sale climbed 6.7% in early June from the same period in May.  Listing rose in 54 out of 100 metropolitan areas.  Are seller's saying it's time to sell?

Redfin has noted that most of their sellers are retirees.  That makes sense especially when the potential of tax increases are on the horizon.  

WHAT OF THE FUTURE?

California real estate is and was a reflection of the Law of Supply and Demand.  As more people moved into California, demand for real estate increased.  With the increase in demand was the correspondent increase in price.  

The past year of so, the news media had numerous articles on the movement out of the State.  Corporations voted with their feet, as did the multi-billionaires who represented the corporations.   But when the evaluation of the populace is concerned the statistics DO NOT support the media claims.

"Researchers from a consortium of universities – including the Berkeley, UCLA, Cornell and Stanford – teamed up in the fall of 2020 to study California’s population. Their finding, released this week, determined there was “no evidence of an abnormal increase in residents planning to move out of the state”. Victoria Beklempis Yahoo News Friday, July 9, 2021"

Victoria's article HERE will give a detail of the actual movement.  It is more a re-distribution of the population; rather than, a movement out of the population.  

What it does mean is that those who are looking for affordability need only look in new areas or old areas that are in redevelopment.  

There is very little that other states can offer; other than, tax advantages. Our weather is exceptional and beaches and outdoors are within reach.  Our medical and educational facilities are exceptional.

So what are the first time home owners to do?  Look within your area and find locations that are affordable.  La Honda, the Skyline area, Half Moon  Bay are choices.  Then there is East Bay straight to the Nevada border.  My wife and I came back from a tour of Granite Bay.  It is ideal for young families.  Lower priced newer homes with great schools and shopping offering all the benefits our Safeway, Costco and Trader Joe's offers.  Kaiser is their in town and Sutter is nearby.  4430 Rolling Oaks Drive is a 4 BR, 3 Ba, 3197 SF home built in 1969 on .6 acres in town with a 3-car garage.  A 2-story Victorian styled home for $1,250,000.  For all those who can work from home and have a young family Granite Bay is a great choice.  I may add we saw no homeless, clean streets and friendly and open town's people.

Businesses such as Tesla and HP and Oracle can move; but the venture capital firms that created them as still here.  The money the creates investment opportunities will create business opportunities.  The business opportunities will create employment opportunities.

Who knows, the San Francisco exodus may just have a new migration as SF rebuilds and refurbishes itself.

The Price of Everything!

The prices of everything, everywhere, are going up.  A house in Phoenix is going up, a Ford F-150, a plane ticket to New York City, they are going up for as much as everything all over the country.   Well, maybe not San Francisco.  There the prices of homes are all down from 10-12%.  The only part of the country and the State of California that is not going up?  Down from 10-12% where the rest our metro areas are up over 12%. 

For pseudo-scientist, aka Economists, it is a dismal picture!  They, along with the people that brought you the last recession, aka Wall Street Banks, say it is only temporary.  "A transitory event that will disappear."  Mark Zandi, the chef Economist at Moody's...yes Moody's the people that gave AAA ratings to bonds supported by mortgages that went into default and put us on the verge of economic collapse WORLD-WIDE......“Inflation is one of the mysteries of economic study and thought. A difficult thing to gauge and forecast and get right. That’s why the risks are high.”    How can inflation be a mystery?  If people can charge more for products in short supply they will.  What is a mystery of one of Economists solid formulas, The Law of Supply and Demand?

The Federal Reserve is taking a pretty big risk with their calculations over a economic study that is "difficult thing to gauge and forecast".

Is this transitory, and does that mean prices will come down?  Will that include housing prices, since housing prices are part of the inflation index?  Oh yes, and when will inflation cease to become transitory?  Will it stop at 13.5% as when President Jerry (can't walk and chew gum at the same time) Ford launched "WIN", Whip Inflation Now?  Remember he had his training in running the Country as Speaker of the House...hint, hint, hint.

The Federal Reserve reported that the May rate of inflation was 5%.  That is the fastest rate in 13 years!.... which was when the economy over heated from the housing boom....Sound familiar....went off the cliff and sent us into the GREAT RECESSION.

Let us not leave the pointer on housing.  Used Car prices climbed 7.3% last month and 29.7% over the past year.  Did you take your old jalopy in to your dealer for some work?  I did, boy did they have deals for my car at Blue Book Wholesale to buy a new car for a premium.  They would make more money on my used car than selling a new car.

Not all things are being priced into the stratosphere.  Healthcare and education are flat, including smart-phones, technology and internet services have been relatively flat.

All eyes are on Houses and Cars.  Interest rates are low and the cost of buying them are low, so why not pay up??? Sure, good idea, you are making a rocket ship rise straight up to a technical blow off!  BLOWOFF? sure it happens in real estate and cars.  The Federal Reserve said they are not raising interest rates until 2023...THAT"S 2 YEARS FROM NOW...we all maybe be speaking Chinese, or North Korean, or Russian..Far better than in a corner reading the Koran and growing beards and long hair and having our women wearing tents with mesh for seeing through...Well at least we can listen to Yellow Brick Road, In a Gadda da Vida and getting high on great California MJ we bought at Safeway.  

Let's get serious here!  The Federal Reserve already began the rate increase.  The Federal Reserve tightened, the rate on which banks get paid for having money on deposit with the FED.  Not much, .37% if I am correct.  But that is not bad for a bank that does not have any clients to borrow money to: if they do, they want 100% certainty they will pay it back.  That means money is being drawn back from supply.  The FED can continue to do that without keeping a thumb on the interest rate we get paid.  Just slowly draw money out of supply.  Wait until inflation stops and then we can go back to normal.   WAIT ON THERE.  What if the "F" factor comes in and inflation rates do not decline.  What if we have not supplied enough lumber, what if there are not enough plants here in the US to produce semi-conductors....what if?  Well, then we sell some bonds and pull more money out of the system.  Interest rates go up from lack of supply of money.  Prices come down on houses and cars? Business slows down.  Stocks go down.  IPO's stop. Layoffs in the high tech industry.  Another Recession.  Foreclosures and defaults.  Sound familiar?  

Now that goes back to when I was about 50 years younger and I really believed they , the economist , knew what they were doing and I believed the Politicians.  Come on Gary, were you that gullible...sure was, and so were you, your parents, and grandparents.  Today you people are a bit more savvy, AREN'T YOU???  Screw it man, we're getting our advice from Reddit.  We're getting those hedge funds shorting companies that are going out of business.  We will make more money and just sit back "bragin" to our buds on Reddit.  

Now let's talk about this reasonably.  Trees don't grow to the sky.  Stock's prices don' go up forever.  If you can buy a 3000 square foot home for under $1 million and a 1350 sf home for $2 million wouldn't you look at how far away is the 3000 sf home?  Would you think twice about paying ridiculous prices for rent in a slum when you could own a home for the cost of the rent in a mortgage payment?  A home where there is no homeless, drugs on the street, trash in the gutter, gun fights and they have great schools in gated communities with pool and tennis courts.  Of course you would.  what's holding you back?

Hey, let's get serious here.  There is a time that prices of homes push reality to far and at other locations is wise.  There is a time when rent gets too high, and there is a look elsewhere.  It will come, so prepare.

I for one, like history to lead me.  Home prices are down some 10-12% in SF.  They are up 12% here.  I moved from SF originally and then my stock trader mind saw the prices in the peninsula, Woodside, collapse.  I bought a house in Woodside for the sale of my Flat in Pacific Heights, or at least upper Cow Hollow.  

If you are a home buyer, look around.  You're working from home with a jaunt to work once a month.  Hey..there are other places to live.  Friends...well once you left the last place the friends were farther away and apart.  You called, chatted, texted and soon...new friends came in.   All part of growing up and expanding our network.

If you are a seller, look around and get the best price now to get an underpriced property elsewhere.  Forget about waiting for the price to peak...there are no bells and whistles.  If you do, the price you pay will move up faster than your sale.  That's the way markets move.  

Not going to sell?  Going to live here until they carry you out in a box?   Sure heard that before.  When that day comes you won't know who is carrying you out and doubtful it is in a box, but your kids saying mom and pop need care.  Sell the house put them in a home.  I sure hope you enjoyed your life to the fullest, took you and your spouse on great vacations and tours before they give you boxing gloves to separate salt from sugar.

Bottom Line.  Inflation is not going away.  The FED or Wall Street and the Banks do not control the cost of living.  You do!  Start thinking about Living...Reddit does it right YOLO.

Houses are getting more expensive. There's a fix to that?

More than 17% of the homes in the U.S. are selling above list price.  Would-be homeowners are furious as they lose bidding wars. Many are looking back in time and thinking "Bubble".  Of course it doesn't help for the "Media" to promote Bubbles!

Prices rise and fall for all assets for a number of reasons.  So what makes something a "Bubble"?  The likely reason is so many people have put so much attention in the price of homes, and their home in particular, that it didn't take to much for prices to rise; especially, when there is a low inventory of homes for sale.

A sharp rise in an asset's price is not necessarily a "Bubble".  The fear comes from the fact it is in our homes, which are usually the last thing we think of.  The last thing, at least, until the newspapers need something to publish. 

Millennials represent 37% of the buyer's today.  They are the driving force of our buying marketplace.  They passed the "Baby Boom" Generation in 2020.  It is only natural they move into the home buying market.  They are the class of buyers with wealth that can bid up if they want something.  They are also the generation that will adjust their needs as they evaluate the market place.

The fact is the market cannot accommodate their interest and supply their needs.  Freddie Mac found in 2018 the shortage of buying to selling was 2.5 million homes, in 2020 it was 3.8 million homes.  Get the picture?  Newly built homes dropped form 40% in 1980 to 7% in 2019.  The Pandemic did not help.  Just getting people back to work created bottlenecks.  The bottle neck in lumber was created by the inability to get workers back to work; but also, the lumber industry's failure to build new plants.  The lack of industry in general to build new plants has been universal.  The failure to build in the US created an extreme bottleneck when the foreign plants were either under tariffs or under the lack of workers due the Pandemic.

The term "Go West Young Man" of the 19th Century has turned into "Go East Home Buyer".  The central portion of the state has been more accommodative to buyers than the coastal areas and the Peninsula in general.

San Francisco has been the worst hit of this movement as SF saw a decrease in home prices of 8-12%; while the Metro Average was +12%.

There are some "Warning Signs".  Demand for vacation homes is wearing off.  Although the number of buyers who locked in mortgage rates to purchase a second home in May increased nearly 50% compared to a year ago, "it's the first time in a year the annual growth rate has fallen below 80%," according to the real estate brokerage industry.  Additionally, mortgage-lending rules over the last two months have tightened. Now, under the new rules, second-home and investment property mortgages can make up only 7% of a lender's total pipeline, which refers to the total number of loans that are either in processing, underwriting or closing process.

The future key is: "price of lumber, interest rates, production and productivity and the elimination of bottlenecks!"

ON LUMBER: Lumber will show us the future.  In early May 2020 the price of lumber on the commodity futures market was $1,600 per 1000 board feet.  This added $36,000 to the cost of a new home; on average, new homes sell for around $400,000.  (What a deal!) On Monday it was back below $1000 per 1000 board feet.  It is still elevated.  Before the Pandemic lumber was never above $500 per 1000 board feet.  It takes two years to build a lumber mill.  The return of workers now can increase supply immediately.  Watch the lumber prices then watch for builders to resume in areas where land is available.  Unfortunately it is not in downtown Menlo Park and Atherton or Palo Alto.  It is in the Sacramento area where builders are once again starting to create projects for new home buyers and +55 retirement communities.  These areas are price conscious.  Builders will hold back projects until lumber prices return to a level buyers will pay to move.  

The Old Chinese Curse..."May you live in interesting times"

Inflation forecasts — like everything else — have been too conservative

GENERAL COMMENTARY

If there's been one consistent theme during the recovery it has been analysts, strategists, economists, and forecasters of all stripes have been incorrect in judging the resilience of the U.S. economy.

The May Luxury Real Estate Report has almost all Luxury Market in Real Estate in the U.S. in a "Seller's Market". (see link at end of report).  The days on the market are short and the buyers outnumber the sellers.

There are many reasons for these circumstances of events. 

1. The Pandemic has allowed many to work from home, thus saving time and money.  
2. The IPO market has been HOT!  
3. New money creates pent up demand to overflow into buyer demand. 
4. Supply in homes for sale is limited for a number of reasons:  a.Sellers do not want to venture out for fear they and their home will become infected.  b. Higher future property taxes. c. Capital gains taxes.  d. Questions of where to move.  e. Establishing new relationships with professionals.
5. The California Department of Real Estate has not made that easy either.  Buyer's must confirm intention of purchase before they could view the property. 
6. Thus we have a limited amount of sellers and an over abundance of buyers.

Forces that will affect asset prices are interest rates and cost of goods.

At present we have an increase in inflation rates to 4.2%.  This is well over the 2% Federal Reserve target.  

The question that will affect the markets is will the recent reported inflation rate force the FED to change?  Will the FED begin tightening on rates.  The answer here may be the recent decision of the FED to sell their inventory of Corporate Bonds and Money Market ETF's.

Selling by the FED takes money out of circulation which will lead to an increase in supply forcing higher interest rates to gather buyers. 

Adding to inflation is the Cost of Goods.  The lack of employees returning to work has led to limited supplies from Wood, Cattle and various other commodities.  A principal reason for the increase in prices is because workers who process the commodities would prefer to stay home and collect unemployment and U.S. Government subsidies than return to work.  Thus creating limited supplies and higher product prices. 

The FED's answer to the current rate of inflation is that it will only be temporary.  

If September 2021 ends the extra $300 in unemployment benefits, will it lead to a mass drop in unemployment and prices.  If that is correct the FED will begin selling their bond inventory before they raise rates. The  FED will be behind the curve.  The market place will raise rates as corporate borrowers go to the marketplace borrowing in anticipation of higher future rates.

Janet Yellen, former FED chair and Secretary of the Treasury, has stated higher interest rates are good for the economy.

LOCAL REAL ESTATE MARKET

Buyers should expect to compete.  Sellers should expect short days on the market and competitive interest in their property.

Cost conscious Buyers should begin to look outside the Peninsula to the East Bay and beyond.  Prices are beginning to escalate in the East Bay and areas around Sacramento where home sizes are larger and prices are substantially less than here in the Peninsula.  The change in the ability to work from home is benefiting those who can move.  The benefit is larger and less costly homes with just as good as, and better than, current Peninsula schools, no homeless communities and safer neighborhoods.

For the empty nesters it is more a function of where to move before a decision to sell.  The move outside of California becomes more controversial as statistics show Californians are more inclined to move within California than the are to move outside of California.  

With each Broker Price opinion I am asked to perform I find that prices are declining, ever so slightly.  In Portola Valley and Emerald Hills the declines have been 4% on an annual basis.  When I look at the Loomis and Granite Bay area the forecast is +12%.  Still the 12% forecast of price increases are well below the comparative home in the Peninsula.

May Luxury Home Market Report

Fears of Foreclosure are Wanning

Over 14% of Renters Are Still Behind as Eviction Moratorium Nears Its End

Thank you

Gary McKae,  01452438, eXp Realty of California  01878277

Inflation, Taxes Rising Real Estate Prices

 It has been a month of watching real estate prices move up in dramatic fashion and forecasters commenting on the top and or commenting it will continue to rise and go higher.  Interest rates are slowly rising and the cost of gas increasing at every fill.  My wife is constantly complaining after her Friday shopping at the cost of bread and milk. 

Real Estate does not have the full attention either!  Stock keep on hitting new highs with the same diverse commentary as real estate prices.  Berkshire Hathaway common stock has hit a price that the quotation service cannot record it any longer; unless the stock is split.  Warren says "no"!

The new administration's spending habit has gotten to a point that what has been spent has to be funded.  What has been heralded as  "Tax the Rich" has turned out to be a double edged sword for real estate, home owners and everyday real estate investors, called "Mom and Pop" enterprises.  The "American Families Plan", per Market Watch, will hit the middle-class home sellers who sell a home in an expensive market and have more than $1 million of Capital gains.  That should include all the Baby-Boomers who own property in Silicon Valley for the past 30-40 years.  The Capital Gain Tax Rate proposal is to move from 20% to 39.6%.  

The next slap at real estate is the elimination of the "step up" of cost when inherited.  This "step up" allows real estate to increase in original purchase value to the market value at death to the heir.  

As an example, my friend says he bought his home in the Farm Estate Estates area of Redwood City soon after he was married for $35,000.  Value today probably about $1.8 million.  My friend's children say "don't sell it Dad, we will inherit it without paying taxes. We can rent it out and pay no capital gain tax, have a step up in basis to shelter our rental income with depreciation."  So much for family tax planning under the proposed tax plan! 

Not only will the property be taxed at the difference between cost and market less exemptions at 39.6% the children will have to sell to pay taxes or pray Dad has enough in savings to pay the taxes.   

My friend's children will be disappointed.  They will inherit a house worth $1.8 million less $35000, less $500,000 exemption and let's say another $180000 if they sell for various expenses and be left with a federal tax of $380,000, not considering state taxes.  If they don't sell the $180,000 will be added to the total taxable gain....OUCH!!

I don't think my friend rich.  He is a retired auto mechanic.  No college education and worked hard to create his own auto repair shop, sell it and retire.

Think about the farmers.  I come from Wisconsin.  I had cousins who owned dairy farms they inherited from their parents and their parents from their parent and so on.  Once they die the tax man comes.  They barely make it, but keep it as a family tradition.  It is hard to see them as soak the rich.

The next slap, or kick them while they are down, will eliminate the "1031 exchange".

"1031" is a very old tax act that allows the seller of income property to sell and transfer the cost basis into a new property without creating a capital gain.  Yes, there are some rules that must be followed, a trustee, usually a title company, to hold the proceeds from the sale and distribute them for the purchase.

This is a proposal, nothing is firm. Congress needs to approve before it becomes law.

INFLATION! Well this is another "hot button".  Members of the Federal Reserve Board, the people to raise and lower interest rates, see inflation higher this year.  Treasury Secretary, Janet Yellen, saw inflation higher until she abruptly changed her mind after a public announcement of her thoughts.  UMMM, interesting, very interesting.

Steel has moved up 44%, sugar + 17.7%, lumber +20%, oil + 37.7%, copper 28.7% all look like inflation as prices have moved up.  Gasoline prices have moved up, water has increased, PGE bills have increased, milk is up, bread is up.  Looks like inflation to me.  I suggest you look at the calculations the FED uses for their inflation index.  Oil for one is not included.  In fact, there are a number of commodities not included.  Political deck stacking?

INTEREST RATES is another "hot button" because interest rates are used to stop inflation.  The Federal Reserve Chairman, Jerome Powell, says he sees inflation as not a threat and will not increase interest rates, using their proprietary formula as stated above.  While Mr. Powell will not raise the FED rates, the market rates on 10-year treasury bond have moved from less than 1% to a 1.75%high this year.  The market sees inflation with higher rates on bonds, and rising interest rates will affect everything from mortgages to credit cards.  Mortgage rates on jumbo loans in February were 2.87% today they are 3.25% with strict credit terms.  That indicates interest rates will rise because inflation is rising and the Federal Reserve will be forced to raise interest rates.  Rising rates will lead to the debt that the Government raises to pay for the $Trillions of budget increases.  The deficit to increase because the cost to borrow, interest rates, will rise and taxes to pay for the increase will increase.

MOVING OUT OF THE BAY AREA:  It has not changed for corporations leaving the Bay Area.  Here is a summary courtesy of SFGATE:

1. HPE, which had 5,992 employees in the Bay Area at the time of the announcement in 2020, isn't closing its San Jose campus, but will be moving its headquarters to Houston
2. Redwood City-based multinational tech company Oracle, with 18,121 employees in the Bay Area at time of the announcement, is also moving to Texas.
3. Although Uber has so far not officially made an announcement regarding its Mission Bay campus, the San Francisco Business Times reported that the ride-hailing company has "softly" marketed its lease on about 300,000 square feet of its more than 1 million-square-foot, four-building headquarters near Chase Center. Uber hasn't officially moved into the offices yet, making the As reported by the San Francisco Business Times, Airbnb listed 78,565 square feet of office space in SOMA on the market. The move comes on the heels of the announcement that Airbnb would be establishing a technology hub closer to the East Coast. The announcement says the company is looking for a city whose leaders will commit to "promote economic empowerment for its citizens" — perhaps a critique of the Bay Area's high cost of living — as well as other factors such as a "diverse technical talent pool" and an environment that people want to make their long-term homes for "hundreds of technical and non-technical roles over time."  news even more dramatic for its employees.
4. Digital Realty, a data center company with 1,500 employees worldwide, announced in January that they'll be moving to Austin, citing "central location, affordable cost of living, highly educated workforce and supportive business climate." The company already had about 20% of its workforce and 30 data centers in Texas, and at time of publication, have 97 employees on LinkedIn listed as working in San Francisco.
5. Although it's a stretch to say that Salesforce is relocating out of the Bay Area, one could say that its new headquarters is the cloud. The company announced in February that it would make its pandemic-related remote work policy permanent and has canceled a lease at a forthcoming downtown office in San Francisco. It has also subleased a portion of the offices at 350 Mission St., leaving Salesforce Tower as a divisive and underused monument.
6. Recommendation-based website Yelp, which was parodied in late 2020 with a SOMA billboard, has put most of its S.F. headquarters up for lease. Yelp told SFGATE the following regarding the decision: "We plan to continue to maintain our presence in the locations where we currently have offices, including our headquarters in San Francisco."
7. Another ubiquitous San Francisco tech company (and constant presence in the intro skyline on HBO's "Silicon Valley") has put its prominent SOMA headquarters up for lease. The 1355 Market St. offices listed 104,850 square feet up for lease following the announcement of a permanent work-from-home option for employees.
8. Design-minded social media site Pinterest has announced the cancellation of the construction of a high profile expansion of its San Francisco offices. Abandoning the 490,000-square-foot expansion was a costly decision for the company as the project had a $89.5 million termination fee.
9.  Sf.citi also lists several other prominent companies who've downsized their Bay Area locations, including Wish, Stripe, Paypal, Brex, Optimizely and Credit Karma. See their full list here.

16.3 million square feet of office space is vacant in San Francisco.  16.3 million square feet equals 10 Sales Force Towers.  63% of the Tech Companies in San Francisco have already downsized or plan on doing so.  The Silicon Valley Venture Capital deal count in 2021 is expected to fall to 20%, a first in history!

With the exodus goes jobs. Silicon Valley has some potential problems.   This is good reason I have more buyers looking out of the area to the Sacramento area.

Spring Season Starts with a Stumble

 This week has started with 5 transactions falling through, 4 listings back on the market, and 11 price cuts, 73 new listings, 9 contingent and 58 pending, with 57 sold.

"Going Back Home" is the swan call of the renters moving.  "Working from home and having every room rented to cover costs is not why we came to the Bay Area."  

Within the next several months we will witness the results of unpaid rent and unpaid mortgages.  I do not have much faith in a solution. The subsidy programs are already finding it difficult to pay landlords.  Landlords who have been unable to finance the deficits will need to consider their losses, eat them or sell!

eXp Realty is training agents for the possible oncoming foreclosure action and bank sale of REO, (real estate owned).  Becoming "certified" is a return to 2007-2011 when we had the last foreclosure boom.  Short sales and foreclosure sales were once the main source of buying properties from speculators to cost conscious buyers.  

In addition to the REO training, eXp is training agents in "Relocation".  After the Financial Crisis, Silicon Valley became a migration center for corporate employees.  I could count on 4 or more assignments in a year of executives moving to the Bay Area.  From the training program under way it has more of the semblance of movements out of the Bay Area.

Where is the main relocation? A new poll says Nevada.  Another poll has Hawaii, Virgina, Colorado and Nevada in the top 4 well above California.  I lived in Honolulu for 13 years and agree with the Top Location of Hawaii.   So is my wife thinking....are we too old to surf?Another poll has Hawaii, Virgina, Colorado and Nevada in the top 4 well above California

But what about moving within California?  The Top 20 for SFGATE in the US have Vallejo, Yuba City, Santa Cruz, Stockton and Eureka in the Top 20.  I can understand the demand.  The most expensive is Santa Cruz of $1,222,000 to Modesto of $499,000 with the others mentioned in the Modesto price range.

If you are looking for something within the state and close to the Bay, look at El Dorado Hills, Loomis and Granite Bay.  I just closed on a  6 bedroom, 5 bath recent construction home on 2.5 acres in Loomis for a little over $2 million.  2 to 2.5 hours from Menlo Park keeps the tether rope not too long.  Then it is a 2-3 hour drive to Tahoe.  The best of all worlds with the Folsom Conservation area for water sports and hiking...horse back riding is a definite YES!  The small town feel is so refreshing!  Take ride and tour the area.  Then call me, my team has just added an agent to represent my clients in the area.