Well 2018 is here, and much has been made about the New Tax Law, following months of intense lobbying effort on behalf of our trade organization. California it seems, will be deeply affected by these changes, and everyone is opining their prediction on what it will do to our housing market here in Silicon Valley.
First, let me say that as a 30 year veteran of Real Estate, I have endured multiple market cycles, and I am still living to tell about it. Many of my competitors have never experienced the ups or downs of multiple market cycles, so really have no basis to judge the effects these new laws will have on our home prices. Indeed it is true that our great recession of 2009-2012 did have a serious impact on our housing prices, and although we did see some very dark days, it turned around quickly and became a serious buying opportunity for many who saw the potential. We weathered the storm far better than other areas of the country like Las Vegas, Detroit, Arizona (which became almost exclusively a market of foreclosures or short sales-very few regular sales). Those markets are still recovering, and doing much better now. We also had our hiccup and saw sales prices dip during that time. But in 2011-12, it came roaring back and kept going, never looking back to where we are today, at unprecedented prices and at a peak.
So now what? Well most of you are aware of what isn't changing: the capital gains exclusion in their primary residence leaves the 500K for married and 250K for single's unaffected. The 1031 exchange is still relatively intact. Child care credit is increasing to $2000/child, phased out for high income earners. The two most significant changes though are: 1. the limitation of state and local taxes to $10K. 2. 750K cap on mortgage interest deduction on new purchases, while existing mortgages will cap at 1M and there are some rule changes about the equity lines of credit. There will also be a significant increase in the per person standard deduction from 12,700 to $24K. *1
So it is with great amusement that I have read tons of opinions within my Real Estate community. It seems everyone is confused. In one article it talks about the strength of the local economy and desirability of our area and the tax incentives to corporations which will help stimulate and keep our economy strong. On the other hand, another article says the sky is falling, and all of these tax changes will have a serious impact on our housing market and the incentive to own a home. Given a dollar for every time I've heard both points of view played out over the 30 years, I would be rich and retired by now.
The truth is, nobody knows for sure how it will be affected ultimately. I suspect for most of the country, this will be welcome news, since they will be unaffected by these changes for the most part. But what about us? I have been door knocking and asking Sunnyvale residents their thoughts on this tax change, and this is what I heard. Google, Facebook, Apple and many other companies are based here and have invested heavily in our area, so they feel they aren't going anywhere. There is a lack of buildable space therefore with so many jobs being created, the housing stock will remain tight. People have told me that it's stock money that is allowing the purchase of homes at these record prices, therefore mortgages will be lower to match the wages and rest will be made up in stock money. Since corporations are going to do exceedingly well with tax incentives, they don't see Buyers backing down from purchasing with their additional stock option money. Additionally, overseas buyers are still looking at our area as a solid place to invest in. We have seen many homes purchased with cash, to be left empty or rented out to overseas investors. Finally, proposition 13 has enabled the transfer down of lower property taxes to decendents rather than the home being sold with the death of a homeowner. I have talked to 2nd and 3rd generations living in the same house with the same property taxes. This has contributed to the very low inventory we have seen. And this is what I know: I sold Real Estate in Canada before moving to California, and in Canada they have no exclusion for mortgage interest at all. There are many expensive cities in Canada, that really are not affected by their inability to write off their mortgages. I also know that since I've been in California, I've seen the first home I purchased in Cherry Chase, Sunnyvale in 1984 for $125K now valued at around $2.2 million despite the ups and downs. So if history is any indicator, California real estate is a great investment, and always will be. There are legitimate reasons for wanting to sell your home: job transfer, retiring to a tropical island, not having all your eggs in one basket, division of equity-due to divorce, death, or wanting to downsize or upsize. Fear should not be on that list.
So what is the takeaway? Don't believe everything you read. Anyone who suggests that Silicon Valley residents are nervous and worried, hasn't talked to the same people I've talked when I've literally walked hundreds of homes in the course of the last month and asked them directly about their thoughts. When "educated" points of view reflect speaking in generalities and play both ends from the middle, I would say be careful and use cautious reasoning. I believe it is always a good idea to entertain multiple points of view, so if you want to have a constructive dialogue by people who have experienced the ups and downs in Silicon Valley and Dot Com, please call us if you are considering a move. We are happy to help you achieve your best result! Call Sheila (408) 730-2410 or Greg (650) 248-1558. Here's to you and your dreams in 2018!
*1 Readers should contact your accountant, CPA or tax preparer for specifics on the new tax legislation, and how it will impact you. This blog should not be relied upon as tax or legal advice.