by J. Robert Taylor, J.D.
There are major socioeconomic forces at work in keeping the inventory of property in the Bay Area at historic lows and in many cases prices at historic highs. Understanding these forces will make you a more informed buyer or seller.
There is a natural inertia against change: It is a part of our nature, but when you add in powerful external forces it influences would-be sellers to delay selling in some cases until death and beyond.
Force 1: Increases in the federal capital-gains tax. Federal capital-gains tax rates increased as of 2013 from 15 percent to 20 percent plus another for those subject to the Medicare surtax 3.8 percent to a total of 23.8 percent federal capital-gains tax for high-income-earning households. While the discussion of tax increases is important, the actual rate any individual will pay is based on their income level and other easy-to-understand tax conundrums like the Alternative Minimum Tax (AMT), so always consult a tax expert.
Force 2: Increases in the state capital-gains tax. State capital-gains tax rates increased from 9.1 percent to 13.3 percent. Again this is dependent on income and other factors.
Force 3: Proposition 90 options have lessened. Sellers have to live somewhere after they sell. Previously there were many counties that elected, under Proposition 90, to allow sellers older than 55 years old who buy down in price to carry their old property-tax basis with them. The number of counties allowing this intracounty transfer of tax basis has shrunk to only eight counties statewide. Sellers may still do this type of property-tax basis transfer under Proposition 60 for intercounty transfers. Almost all of the typical retirement destination counties in the state have opted out of Proposition 90.
Force 4: Remodeling. A lack of inventory for buyers perpetuates the same problem for sellers who must find somewhere to buy once they sell. Even if a seller wants to "move up" in the market, the prospect of not finding a home to replace the one they sold is prompting many would-be sellers to remodel and add on to their present home instead. This is also why we are seeing construction dumpsters in the streets all over town.
Force 5: Lack of higher-priced income property. If you own an income property, the tax-rate increases have a discouraging impact, unless you can do a 1031 tax-deferred exchange. However, due to rising rents, there are very few people selling residential income property since it is yielding a net cash flow that is significantly better than current money-market investments. Thus, the lack of inventory to purchase holds back those who might otherwise consider trading up using a 1031 exchange.
Force 6: Rising employment in the Valley has taken off a considerable amount of economic pressure that was present during the recession. If you have a good, paying job, why would you consider moving?
Force 7: The rise in the gift and estate tax to allow individuals to pass over $5.25 million (couples with estate planning can pass over $10 million) to heirs with a stepped-up tax basis on real-estate assets has encouraged many with huge capital gains to hold on to their real estate until death. A surprisingly large percentage of home listings were due to a death. The heirs can sell and skip out on most, if not all, of the taxes mentioned above. However, our population is living longer than ever before. This, along with the tax incentive not to sell, is deferring any decision to sell. A minor force in this process as well are Propositions 58 and 193, which in some cases allows all parents or children and even grandchildren to "inherit" the property-tax basis when a qualifying property is gifted or inherited. The value of low property taxes has soared as the value of real estate has escalated in the last 25 years.
Force 8: Despite the recession, most real-estate values in the Bay Area were not as seriously impacted as in other areas of California and have rebounded in value faster than other areas. This leads sellers to feel that their asset is safer, in the event of another economic crisis, than other investments.
Force 9: Societal patterns are changing. Where in the past people would consider moving out of their home into a retirement setting, the new model of "aging in place" has become the norm. Seniors are utilizing the access to excellent healthcare, including the availability of life-extending procedures, joint replacements and the like. Seniors are also increasingly utilizing technology in home care with life-alert pendants, camera monitoring and electric-assisted wheelchairs and scooters.
Force 10: The Bay Area is just a great place to live, so thinking about alternatives that have upside are hard to find. Beautiful weather, superior healthcare, community resources, home to world-renowned universities, and easy access to the beach and mountains are just a few of the reasons people stay put.
Despite all these forces, some people do decide to sell, just not very many. For those who are staying put, you can decide which of the 10 forces is making you stay put; and may the Force be with you.
J. Robert Taylor, J. D., a real-estate attorney and broker for more than 20 years, has served as an expert witness and mediator and is on the judicial arbitration panel for Santa Clara County Superior Court. Send questions to Taylor c/o Palo Alto Weekly, P.O. Box 1610, Palo Alto, CA, or via email at firstname.lastname@example.org.