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.