Monday, April 17, 2017

1Q17 Real Estate Update--plus more!

The Piedmont Market

Man it's crazy out there!  The upward push on prices feels unrelenting.  And I say that with a bit of trepidation.  As you know, my view is that the "relocation" of tech ground zero from Silicon Valley to San Francisco/Oakland, together with absurdly low (but nationally set) interest rates for this super-charged region moves us up the supply-demand curve.

We saw 15 sales this quarter in Piedmont (as reported in the MLS), one-third of which were all cash.  The average home sold for $2.32 million (median $1.975m) in only 7 days, at 16% over asking.  This translates into $837/sf.  Prices ranged from $1.28 million to $3.495 million (the latter with a price/sf of $997--this is consistently our high-end or small-house figure).

A year ago, we had so few sales that the information was trash--8 sales, $2.475 million average price, $730/sf, 12% over asking.  I won't event talk about change 1Q16 over 1Q17. 

But last quarter you might recall was consistent with, but a tad lower than, this quarter's activity:  An average sales price of $2.15 million (median $1.85M), secured in an average 14 days at 8% over asking. 

In addition to the ever rising prices and consistently low inventory (call me now to plan for this year's sales cycle!), we also see a shift towards all-cash offers.  As I say to my buyer clients, there is "god's price"--the price that the market suggests--and then there is "the price that gets the house." These days, there's an increasing delta between those two figures.  And buyers have realized that in a rising market, an all-cash offer eliminates the only major risk sellers now face:  That the appraisal might come in lower than the sales price. 

Most successful offers today are contingency free, but offers involving a loan require an appraisal, even if there's no appraisal contingency.  And no buyer likes to be told by a professional that the house is worth less than their offer--even if the buyer has said over and over they are willing to run that risk.  So a classic seller move is to go to the one all-cash buyer and say "we have an offer with a loan at $x; if you meet that price, you get the house." The corresponding buyer move is to borrow $x from mom and dad, and then get a purchase loan to "take out" mom and dad within the first 60 days of ownership.

Unfortunately for my hardworking buyers without family money, this strategy is in play across all price points throughout the "inner" East Bay, at least for highly prized homes and locations. 

Expanding our view, the close-in neighborhoods of Oakland surrounding Piedmont (94610, 11 and 18) saw 88 sales of detached homes, an average sale price of $1.387 million, 12% over asking, $610/sf, in contract in 14 days, and a typical 5 offfers (when reported by the MLS).  Note that $600/sf was the average in Piedmont back in 2006, and again only a couple of years ago.  Looking at 1Q16, these same communities saw 81 sales averaging $1.15 million or $530/sf, and closing at 16% over asking.  This suggests a price rise of about 20.6% over the past year. 

Similarly, Berkeley, which saw the upward pressure before higher-end neighborhoods in Oakland, saw nearly 20% increases in prices 1Q16-1Q17:  The average single family home in Berkeley sold for $1.248 million this past quarter, or $738/sf, at 15% over asking.  A year ago homes were selling for $1.052 million or $650/sf, 14% over asking--an increase of 18.6%.

Key takeaway--the price gap among Piedmont, high-end Oakland, and Berkeley is narrowing compared to years past.

Across California, the CA Assoc of Realtors reports that in February, 2017, prices were up 7.6% year over year (to $479,000), total sales (#) were up about 5%, and days on market were down about 20% (to roughly a month, compared to our week in Piedmont).  So higher interest rates (up about 1/2 percent to 4.18% for 30-year fixed financing) and tougher affordability (the ratio of costs to own to average income declined by just 1% during the year) did not create much drag on the housing market.

Selma Hepp, Pacific Union's economist, does really nice work in my humble opinion, published here.  And if you want to scope out the region's markets, see these data covering areas in which Pacific Union operates--from Silicon Valley to Napa and Sonoma, plus Tahoe and, very soon, Los Angeles.  Remember, I can help you find a great agent to work with outside my Piedmont/Oakland/Berkeley/El Cerrito/Albany turf (I know what I don't know!)--I've recently done that for clients buying in Contra Costa, as well as on the East Coast and in San Francisco.

Got Scrip?  Renovating?

You thought your scrip days were over.  They are never over!  I was at Home Depot recently buying a vanity and sink for my new listing, and was able to benefit the Piedmont schools at 4% of the investment.  Years ago, when I ran the program, I put together a factsheet that emphasized all the ways your classic renovation purchases could drive money to our local public schools. I don't think the factsheet is still around, but check out this website for more--those renovations involve big investments, compared to your weekly grocery bill--Pottery Barn/Williams Sonoma and family pays 8% to the schools!

And While We're Talking Doing Good for Kids----

The Children's Support League annual Heart of the Home Kitchen Tour comes up at the end of the month.  Buy tickets online (through 4/21) here, and don't forget to order lunch.  And give a shout out to colleague Julie Gardner, whose gorgeous Crocker Highlands home is on the tour this year.  We still love her, even if technically she left town! 

And while we're Talking the End of the Month---- 

It's the Heart of the Home tour, so I have a great new Piedmont listing.  Level-living once in the front door, four bedrooms (including a big master with not one but two large closets), two baths, 2161 sf, lots of charming details and a nice big private flat yard. 

Looks like we'll have a special collaboration with Farrow & Ball paints and wallpapers--Piedmonter Terri Ashton is helming their new shop on 4th Street in Berkeley.  More details later, but for now, be the first to email me and receive a copy of the firm's big How to Decorate idea book, by Joa Studholme and Charlotte Cosby!


Another Strategy when Buying

We and your loan officer often recommend looking at a home equity loan to solve the "do I buy first or sell first?" conundrum.  Take a home equity line out on your long-held home, buy the new home outright (looks like all-cash--see above--to the seller) or at least make a hefty downpayment, and then circle back to sell the long-held home and close out your position.  Following this approach typically eliminates the need to move to a rental for a while, pack up twice, board the dog, worry if you will ever find a new home, and so on. 

But home equity lines can take a long while to wrap up.  You could sell stocks, but then you'll pay capital gains taxes.  If you happen to have extensive equity holdings, you could alternatively borrow against your stocks for that short-term liquidity--as an example, Schwab calls this their Pledged Asset Loan.  See this factsheet for their approach, which most firms offer.  Again, once you sell the big house, you circle back and close out the short-term loan.

All this applies if you happen to be thinking about helping the next generation buy into the market--lucky them------ 
 
Baby Clothes for the Needy?
 
Pacific Union's community foundation focuses firmly on those in need, as does that of the Oakland Berkeley Association of Realtors.  Combined, the two distribute about $150,000 annually to non-profits and needy families in the East Bay.  You might not have extra cash, but what about baby clothes?

The OBAR is collecting clean used baby clothes (up to 12 mos) for distribution by local hospitals, social workers and clinics to homeless families and others in need.  If you have clothes languishing in the attic--or have a neighbor who's recently wrapped up that phase of life--just bring the clothes to our office (1900 Mountain Blvd. in Montclair) or to Holmgren and Associates (same address) during business hours.  And if that's inconvenient, email me and I'll pick up!  And....drumroll... this year's clothes are distributed on Mother's Day, so reach out soon.
 
East Bay Plant Sales!

It's that time of year!  Now that the drought appears to be broken, maybe it's time to invest in the garden. 

The East Bay Parks District sale is coming up this weekend at the District's botanic garden near the Brazil Room--click here for more details and a provisional list of available plants.

Merritt College's great sale is coming the first weekend in May. For more details, click here.

And also in early May are two garden tours--Going Native and Bringing Back the Natives--that site also has a list of public and non-profit nurseries specializing in natives.

And finally--

My annual pitch to get out into the East Bay's fabulous parks.  My fave is Sibley Volcanic Regional Preserve (as the guides say, it's not a hip red pepper jelly).  I've spent way too many hours up there thinking about how best to represent my buyers and sellers while walking the dog(s). (No bad news; Gus is at college with the Youngest Son, so it's Doc and me these days.)

But with this year's dramatic rains, the wildflowers are more numerous, varied and later than usual.  The lupines and farewell-to-springs are just coming into their prime, the blue dicks and poppies are ubiquitous, and the shooting stars have shot their wad already.  If you're working on steps, miles and staircases, it's the place to go! 

Tuesday, February 21, 2017

Towels Please?

A colleague who belongs to the Rotary Club in Berkeley has a plea for towels for participants in the Rotary-supported BOSS (Building Opportunity in Self Sufficiency) homeless shelters.  

I'm going through my household for items for Dress Best for Less, the Discovery Shop on Piedmont Avenue, and Bambino (Children's Hospital) on College Avenue right now.  Older towels seem like a no-brainer.

Let me know if you want me to swing by and pick some towels up from you, or leave at the door at 312 Pacific Avenue, and I'll pass them on to Jack McPhail and the Berkeley Rotary Club (and can probably swing a donation receipt if that's important).

Thank you!


Saturday, January 14, 2017

What Will my Taxes Look Like upon Sale?

Racing the clock so you get to the plant sales......  

Clients have been asking me questions about the details of selling their long-held home--as they should!  It's an important transaction involving what's likely to be your largest asset.

 I always say, "I'm not your attorney nor your tax advisor, so check with them, but in the main, ....."  Issues range from how much taxes will be due/how much they will net for the future, to how to coordinate selling and buying in a convenient time frame, to whether it's risky--or possible!--to buy a new home before circling back to sell the old, to are there ways to avoid taxes or property tax increases (given that Prop 13 suppresses your property tax bill in your current home).  I've covered many of these issues before, but will reiterate in the next couple of months.

I've asked Piedmont tax advisor, Dean Emerita and current professor of the Golden Gate University Braden School of Taxation, Mary Canning to answer the most common questions I get.

1.  In the main, what kinds of taxes are due to the US and California when you sell your home?  Can you assume a $1 million purchase price, $2 million sale price and $200,000 of transaction costs (escrow fees and brokerage costs when I bought and sold, and paint and new carpet when I go to sell)?

Assuming taxpayers are married filing jointly, and they have lived in their home as a principal residence for 2 of the previous 5 years before the sale, the taxes would be calculated as follows:

 $2,000,000 sales proceeds
-$140,000 (combination of commissions paid, selling costs, escrow fees, staging and other fix-up costs)
-$1,060,000 cost basis (purchase price plus closing costs paid on purchase)

$800,000  capital gain

-$500,000  Section 121 capital gain exclusion ($250,000 if single)

$300,000 Long term taxable gain

Federal tax liability at 20% preferential long term capital gain rate: $60,000
California tax liability at 10.3%*   $30,900  

So after the sale and payment of taxes and expenses, you would have $1,769,100 in hand.

* Note CA does not have a fixed preferential long term capital gain rate as Federal has.  California's tax rate can range upwards from 10.3% on $300,000 of gain to a top rate of 13.3% (with mental health tax on $1,000,000 of taxable income) depending on the taxpayer's other taxable income in the year of sale.  

2.  What if I added a master suite?  Replaced the roof?

These expenses would increase the cost basis in the above example, thereby reducing the net taxable gain and taxes due.

3.  What if I still have a $1 million loan on the property?

This affects after tax "cash-in-hand," but not the amount of tax due: 

$2,000,000 sales proceeds
-$140,000 commissions, staging and fix up costs, other escrow and sales costs
-$90,900 (combination of Federal tax liability $60,000 and State tax liability $30,900)
-$1,000,000 payment of debt

Or $769,100 net spendable cash 

4.  Isn't that a lot of tax, compared to investing $1 million in stocks?

The tax liability (rates) would be the same, assuming that the stock was held for more than one year.  There are fewer costs associated with the purchase and sale of stock, but generally the dollars invested in the purchase of a home are initially only the downpayment.  Mortgage interest is fully deductible on up to $1,100,000 of debt used to purchase and improve the home so long as the debt is secured by a mortgage against the home.  Any debt used to purchase stock is investment interest and is subject to limitations on deductibility. 

5.  Is there a way to avoid paying taxes?  I thought a home sale was tax-free as long as I bought something more expensive?

It was never tax free.  Prior to a tax law enacted in 1997, you could defer (but not escape) the gain on the sale of a residence so long as the purchase price of the new home equaled or exceeded the sales price of the old home.  This law was repealed for sales after May 6, 1997 and the current law taxes the sale of a residence in the year of sale, but added either a $500,000 (if filing jointly) or $250,000 (if single) exclusion to reduce the gain on sale, and thereby reducing the tax. This exclusion, often referred to by the governing Internal Revenue Code section 121, is available for sales of homes that were the taxpayer's principal residence for 2 of the 5 years preceding the sale. See application of this exclusion in computation above at Q&A 1.

Although generally not applicable to the sale of a principal residence, a tax-deferred exchange under Internal Revenue Code Section 1031 provides a way to avoid paying taxes on the sale of property used in a trade or business or held for investment (for instance, rented out), if the proceeds are invested in a replacement property (and other requirements are met).  Although the tax liability on the sale is deferred, the basis of the new property is reduced by the amount of taxable gain on the sale of the old property (which will, among other things, affect the amount of depreciation available on the new property).   
If the new or replacement property is later sold and the taxpayer wishes to "cash out," rather than reinvest in yet another property, the deferred tax will be due, together with the tax on the gain of the new property.

Sometimes, it is possible to combine the 121 exclusion and the 1031 deferral - a personal residence is converted to rental property and then exchanged into other rental property, providing income into the future.  

If that same taxpayer rents out the new property for some period of time (a rule of thumb is 1 year), the taxpayer may then convert the new property back to a principal residence.  The tax advantages of the Section 121 exclusion and the 1031 deferral are preserved so long as the new property met the requirements of investment property.    

7.  What about Proposition 13 Transfers?

Before Proposition 13 passed in 1978, the average property tax rate in California was 3% of assessed value and there was no limit on annual increases. Under Proposition 13, the assessment rate is now only 1% for all California property (although counties are allowed to include additional assessments), and annual tax increases are limited to no more than 2%. 
 
Proposition 60 was passed to allow taxpayers age 55 or older to buy a new home but keep their same property taxes so long as the new home is of equal or lesser value and is located in the same county.  This is a once-in-a-lifetime election.  Proposition 90 was passed to allow for transfers from one county to another (so called "inter-county transfers") if the new county has adopted an ordinance allowing such transfers.   Under certain circumstances this can be a very beneficial tax savings.  However, the counties accepting transfers are limited with currently only 11 out of a total of 58 California counties participating [see this list and info sheet from the state for more info-MK].  

Further, one should carefully consider the value of this step as the savings may not be as significant as they might initially seem, especially where the taxpayer is buying a much less expensive home.  


Thanks Mary!  She can be reached at canning.mary@gmail.com.  

Mary, together with exchange specialist James Callejas of IPX 1031 helped us arrange a 1031-121 exchange when we bought our home on Pacific and 15 months later, after renting it out, sold our home on Pala.  We were able to pull out $500,000 in cash (the Section 121 part), and invest the balance of our sale proceeds in rentals in the area and in Portland.  (We now have two sons in Portland, and could potentially convert one of the rentals there into a pied a terre at some point in the future, converting the condo back into a personal residence.  If we did that and later sold it prior to our deaths (when the estate tax rubric would kick in), there's some complicated tax calculations to be done).

We deferred tax, and could have used the $500,000 as a downpayment on a new home, securing a mortgage for the balance.  Or you could set your sights on Ashland, OR, for instance, buy your retirement home for $500,000 cash, and live mortgage free.

The older of us (that would be me....) wasn't 55 yet, but if I had been, we would be saving about $10,000 a year in property taxes by taking advantage of Prop 60.  Bummer.  But a number of my clients want to sell their $2 million home and buy a $1 million home elsewhere.  In Mary's scenario above, the future tax bill would be about the same either way, so no need to feel limited to 11 California counties if you really want to be in Marin (which is not on the Prop 90 list of cooperating counties).

If you're trying to think creatively about getting from here to there, be sure to work with an agent who knows the process and has a stable of tax, exchange, and property management professionals ready to make it happen for you.  

So go to the plant sale and then take a hike in that great East Bay asset that is Tilden Park!


Out of Order!--3Q16 Piedmont Update--

Last newsletter we talked about softening markets in San Francisco and the South Bay (but not here).  This quarter we see just a few signs of potential slowing.  From July to yesterday, 30 homes sold in Piedmont (on the MLS) at an average price of $2.328 million ($789/sf) and median of $2.134 million ($805/sf).  This compares with 26 homes selling for almost exactly $2.1 million median and mean in 3Q15 (and 44 in 2005).  The median home sold in 13 days (two weekends of open houses) though one home sold after nearly four months, dragging down the average.  The typical sale price was about 5% over asking, compared to something closer to 10% over asking a year ago.

Eight of the 30 homes sold for under the asking price--a new thing--though interestingly we also saw homes with only one offer selling for over the asking price.  Presumably the agent didn't realize that there was no competition--always important to do your due diligence!--or the sellers convinced the buyers through negotiation to up their number.  

Across the East Bay, we are certainly seeing sellers put their home on the market at an attractive, below-market number, hoping for multiple offers, but then get one or a couple offers below a number they think is fair.  Sometimes the house comes off the market, sometimes the price goes up to that magic number on the MLS, but generally, sellers have still been getting roughly what they want, perhaps after another couple of weeks, together with relate anxiety. But as we head into the more quiet 4th quarter of the year, things seem to be cooling at tad.

In our nearby Oakland neighborhoods (94610,11, 18), the average home price was $1.043 million, and $961,000 through 3Q15, an 8.5% bump. Coinci-dentally, 241 homes sold in both windows, about 20% fewer than in top-of-the-market 2005. 

My CSL Kitchen Tour Weekend for a Home Sale is Still Open!

As many of you know, I've gotten into the habit of putting a centrally located home on the market over the weekend of the Children Support League Heart of the Home tour (this year scheduled for April 28-29th; see http://wehelpkids.org).  We annually have 2,000 well-networked folks driving through central Piedmont, and they are all going to chat with friends afterwards.  Wouldn't you like one to stop into the all-day open houses and then later call a friend and say "you need to get young John over here to look at this Piedmont house I saw on the market this morning--it's got X, and Y, and Z, just as he wants!"  That self-selected but carefully targeted word-of-mouth marketing, backed up by thoughtful advertising (including in the tour booklet itself) is priceless.   

And the payoff has been dramatic.  Last year's offering garnered 11 offers and went 48% over the asking price, and previous years' outcomes have been similarly impressive.  When a fixer, or a cosmetic fixer is the subject of all-day Friday and Saturday open houses, plus the usual Sunday afternoon open, as was the case last year, I throw in my other specialty--the Renovator's Open House which earned front page coverage ten years ago by the 
San Francisco Chronicle.

So if you're anticipating a spring sale, get in touch and reserve my time!

Say Goodbye to 2016

With taxes kept low by Prop 13, mortgage rates locked-in at historic lows, and the prospect of capital gains taxes dropping in the next tax reform package, we potential sellers are experiencing what economists call "stickiness."  We're not overcoming inertia and moving when our circumstances change, but rather we're responding to incentives and staying put.  

As a result, a large proportion of my work is educating my clients so they are comfortable and confident whenever they decide to make their next move.  What's an electronic signature program?  Why should you care about the financial strength of a new co-housing development? What options are out there to defer or avoid capital gains taxes on the sale of a long-held home, and make a planned charitable donation or get some nice monthly income in the bargain?  I help people make great real estate decisions, and I get paid when they or their friends and colleagues rely on my advice when they buy or sell a home.

As I've said here before, the center of the Bay Area economic engine has been shifting gradually from Silicon Valley to San Francisco and Oakland.  Based on Pacific Union's transaction data, we're increasingly seeing tech households purchasing in the East Bay rather than households from the legal, management and finance/insurance/real estate (FIRE) fields.  And that means a number of tech households, looking for great schools and good housing stock, are focusing on Piedmont for the first time. 

The median home price in Piedmont increased 5% this year (based on MLS data, through 12/29).  Since 2014, prices jumped from a median $1.75 million ($652/sf) to $2.1 million ($791/sf), with a 15% increase in 2015.  Not only did the rate of price increases slow down in 2016, so did the volume--only 95 homes traded in 2016 in contrast to 147 in 2014, and 116 in 2015.  In fact the total volume of real estate sold in town declined by nearly $50 million/25% between 2014 and 2016, meaning transfer tax revenue is down rather dramatically.  

We saw this decline in the number of homes sold across all markets and submarkets in the East Bay, even though underwriting criteria have eased.  Downpayment requirements are the likely culprit--20% of a big(ger) number is a big(ger) number, and area incomes have not kept pace.  With interest rates increasing since early November, we're likely to see more Bay Area first-time buyers falling away as their window for homeownership closes.

Prices in Berkeley shot up even further, particularly for the sweet spot of $1 million-$1.5 million homes.  There, prices went up 16% in 2015, and then 8.6% over the course of this year.  At this point, buyers will pay roughly the same for a 3 BR/1 BA home in 1600 sf in Berkeley as in Piedmont!  

Prices in Oakland 94610 (Crocker), 94611 (Montclair/Piedmont Ave.) and 94618 (Rockridge/Upper Rockridge) also increased about 25% over the two-year window, but in a reverse of the trend in Piedmont and Berkeley, prices rose nearly 15% in 2016, but only 9% the previous year. Perhaps regional buyers have come to appreciate the great commutes, restaurants, movie houses, shopping districts and those fabulous La Farine savory morning buns only more recently. The entire Oakland market is up 31% over the two-year window, as neighborhoods recover from those deep dives of the housing crisis, and first-time homebuyers again find that Oakland neighborhoods offer affordability.

As always, I'm happy to help you think through your real estate options, whether buying, selling, renting or renovating.  If you have colleagues, clients, friends or family who plan to buy or sell in the East Bay Hills, I promise to work hard to earn their trust, protect their privacy, and exceed their expectations.

Happy New Year!

Personally, I'm anxious to move on from last fall.  So let's all recommit to act local again!  Well, at least after vacations--

We've continued our commitment to take long hiking vacations; this past year to the Inner Hebrides and to the High Sierra.  Those long hikes, interrupted only by a lovely shooting star or a tasty mushroom, provide time to think and plan, and sharpen my commitment to service, both professionally and personally.  Even during the workyear, I find my best strategic thinking about marketing a home or building a winning offer for buyers happens up at Sibley while walking the dogs in the early morning.

Hiking may not be at the top of the list toward the end of this year though--I'm celebrating my next BIG birthday, and we're heading to Paris for art, food, and friends.  

Here's to a great 2017 for us all!