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.