Serendipity+FED+Inflation+Property Tax Ploys=Real Estate Prices in the Bay Area

 Serendipity is the "Occurrence and Development of Events by Chance in a Happy or Beneficial Way."

This is how the development of Facebook and its growth was established.  At least in the eyes of Facebook.  But there is many professions in which that occurred.  Traders, whether they be stock, bond or commodities; all had their instances of a serendipitous event while in a trading room, on the floor or in the local bar after trading hours.  It is this event that has been centered in large cities or a metropolis; in which the profession was centered.

The result is, or was, that the cost of living all expanded to fit the large incomes that the profession provided.

Take that and look at Silicon Valley.  Prices have escalated and the cost of living and home prices all went up accordingly.  While there has been a calling of a top and calling for a correction in home prices, it has all been for naught!  Once incomes continue to expand and the related benefits of working in such an area, home prices will rise and they will continue to rise.  Unless there is an economic catastrophe, this is the natural order.  When the incomes collapse, the equity markets collapse people out of work, home prices will collapse.  So focusing on that possibility is fool hearty! You might as well plan your death and fail to enjoy your life.  A fool's plan!

I listened to Art Cashin on CNBC recently talk about his experience of a life as a young trader on the NYSE. "The rumor was in that the missiles were launched during the Cuban Crisis and I went looking for my mentor.  Finding my him in the local bar across from the NYSE, I wanted to buy puts, due to my limited income and assets.   My mentor said, buy all the stock and calls you can.  If the missiles are true. we have lost everything.  If it is wrong we make a handsome profit."

So if there is the thought among any of you buyers you are going wait for the crash, you are in a fools paradise.  If it crashes, you have no job, no income and all your assets are lost.  If you are wrong property values will continue to rise!

The Federal Reserve, AKA the FED, was established December 23, 1913.  The FED is the central bank of the United States.  It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system.  To date the FED has created over $8 trillion to help support of economy.  That is $8-9 trillion of additional money in our monetary system.  The creation of "new money" has driven down interest rates to near "0" that has created a flow of funds away from bonds to equity and equity related investments, ergo stocks and real estate.  Until interest rate increase to a level that makes bonds and fixed interest rate investments attractive, equity and equity related vehicles will be  the choice of investment.  

Inflation has been said to be a temporary!  The FED has now stated that inflation is not temporary.  If you look at food prices and energy prices as over 25% of the inflationary measurement, it is hard to fathom a temporary situation.  Nitrogen is a major factor in farming.  Nitrogen is made from a combination of chemicals, the most dominant part being natural gas.  The recent "green" movement has made natural gas a limited product.  Farmers have not been able to get quotes for nitrogen fertilizer and have cut back on production.  Grains are essential part of our food source.  Grains as Wheat, Corn and Soy Beans are used to feed livestock.  With the limitations on production prices increase. inflation is not temporary as crop growth is seasonal.  The competition for the natural gas that is available is taken over by the highest bidder.  The highest bidder is LNG producers who are shipping LNG to Europe and Asia were prices are substantially higher and great profit spreads exist.  The farmer looses and we pay higher prices.  Inflation is not a temporary situation!

Oil and oil related products are essential to farming and building.  Wood prices have escalated and appear to be in a new "bull market" of higher prices.  Homes are constructed of wood.  Prices of new homes will increase.  Inflationary pressure will continue until the shortages are addressed.

Property taxes in California are a % of the sales price of a house at the time of purchase.  It is about 1.25%.  The Trump administration put a $10,000 limit on the personal income tax deduction for property taxes.  For most states it is not meaningful until you consider Silicon Valley Real Estate.  That means that once a home is purchased for more than $800,000 the property tax paid is a limited personal deduction on individual tax returns.  Now consider that the average home sales are well above the $800,000 bar.  Why would a buyer pay over that amount and pay handsomely over list prices without the consideration of the property tax limitation.  The State of California and other states with the penalty tax deduction by the Trump Administration have come to the rescue.  The rescue is for those who have substantial incomes and work under contract with their personal LLC or Sub-Chapter S Corporation.  California has allowed the property tax to be paid and deducted by the LLC or Sub-Chapter S Corporation.  California will issue a "credit" for the individual to use for property taxes due.  The end is the total property tax over $10,000 is now deducted in total from income and the net flows from the LLC or sub-Chapter S Corporation to the individual as taxable income.  The result is home prices will continue to increase irrespective of the property tax limitation.  

Unless there is a major change in the formula referenced in the subject of this article, home prices will remain strong and go higher.  Waiting for a decrease in home prices will be futile.

What can upset this calculation?  

A BLACK SWAN EVENT, a phrase commonly used in the world of finance is an extremely negative event or occurrence that is impossibly difficult to predict.  In other words, black swan events are events that are unexpected and unknowable...Nassim Nicholas Taleb, Fooled by Randomness, 2001