Nicole Aron • DRE#00952657 • 650.740.7954
We were recently invited to address a group of finance and estate planning professionals. They were looking for an update on the local real estate market and the question that seemed most interesting to them was whether we thought our local real estate market was in a bubble.
Prospective clients ponder this question also. Sellers wonder about the timing of selling wanting to maximize the value of their homes, while buyers hesitate to jump in concerned about a decline in prices.
The real estate market is governed by a very basic economic principle: supply and demand.
The Peninsula continues to be a very appealing place to live. The diverse local economy includes companies and institutions that are transforming all aspects of life, attracting people from all over the world who want to live in such a vibrant and inspiring place and close to their employment, fueling demand for homes.
We have been in a sustained seller’s market since 2012 characterized by a lack of available houses for sale compared to the number of qualified buyers. We believe that the shortage of homes will continue and here are some of the factors contributing to the dramatic decrease in inventory over the past decade.
Limited space combined with flawed and complicated urban planning processes and a desire from residents to maintain the status quo have resulted in an imbalance between demand for housing and new housing units.
In 1978 California voters in an effort to address the rapid escalation of property taxes passed Proposition 13 amending the California State Constitution. The legislation triggered a reassessment of property values rolling them back to the 1975/76 values, and a cap of 2% was placed on the amount by which a property’s assessed value could increase annually unless a change of ownership or new construction occurs. The 2% cap on the annual increase in assessed value has encouraged long-term ownership by making it more affordable to stay in one’s current home compared to purchasing another home, especially in our communities where it is not uncommon to see appreciation in double digit numbers.
Propositions 58 and 193 are later amendments to the State Constitution that exclude from reassessment property transfers between parent to child (1986) and grandparent to grandchild (1996). Thus, children or grandchildren who become a property’s owners retain the assessment of their parent or grandparent.
We recommend that seniors fully explore the possibility and requirements of a tax transfer by consulting with the County Tax Assessor and their tax professional.
Most seniors who wish to simplify their lifestyles and downsize find that there are limited options available if they choose to stay on the Peninsula. There are senior housing communities but many have waiting lists and qualifying requirements. For seniors who prefer independent living, Propositions 60 and 90 were enacted to facilitate downsizing, allowing qualifying seniors to retain their current property tax base if they purchase a home that costs the same or less than their current one. Proposition 60 allows the transfer within the same county, while Proposition 90 allows it between participating counties. There are 11 counties in California that allow a senior this benefit. Locally these counties are Alameda, Santa Clara and San Mateo.
In our area due to the very high cost of housing most seniors are not able to find a suitable lower cost option, consequently many defer the move to senior housing until it is absolutely necessary.
For many seniors in our area the equity in their homes is their retirement savings. For a married couple there may be an exclusion from capital gains taxes of $500,000 and for a single person there may be an exclusion of $250,000. When the “new” law went into effect in 1997 this was considered a handsome gain, but now 20 years later many seniors have equity in their homes exceeding millions.
In addition to federal capital gains, there are state capital gains and the Affordable Care Tax. Some seniors worry that once the taxes due on the sale of their homes are paid, they will not have enough left to acquire a replacement home and their personal support.
Prior to the current capital gains rules trade-up buyers could roll the equity in their existing home to a replacement home without paying capital gains taxes. Under the current rules taxes, net of the exclusions mentioned above, are paid when a home is sold. The tax consequences of a home sale have caused many owners to expand and remodel rather than selling.
Understanding the tax implications of a property sale is essential and a qualified tax professional should always be consulted. We routinely give this advice to all of our clients so that they are fully and accurately aware of all the implications.
Overall the market remains stable and strong. Except at the very high end of the market where purchases are discretionary, demand for homes exceeds the supply in all communities, a classic “seller’s market”.
The market remains excellent for sellers. Homes continue to sell quickly, at prices close to or in excess of their list prices and with very favorable terms.
A “seller’s market” can be intimidating to buyers, but our advice is to jump in because housing costs continue to rise in our area. Given the ongoing shortage of available homes, successful buyers are those who recognize that if they wish to live on the Peninsula they will need to be flexible, focused and engaged
855 El Camino Real Suite 13A-282
Palo Alto, CA 94301