I think these buyers with $3M budget would also prefer to buy in PA rather than in Sunnyvale.
The problem is due to the distortion in the market caused by the lack of inventory and extreme competition. It allows sellers and their agents to play games.
The cheapest house in the neighborhood, which everyone wants to buy, is usually grabbed by the cash buyer, house flipper, or else the seller may be selling to some friend or relative for a discount due to their relationship. The average buyer competing fairly in the open marketplace is shut out of these deals.
So, the $3M cheapest house in PA is out of reach of the buyer with $3M budget, but the same buyer has much more choice in Sunnyvale and May end up buying the expensive house there. Similarly in Sunnyvale 94087, buyers on the open market cannot buy anything for $2M because those houses are not openly available. Instead they buy the $2M expensive house in Santa Clara or Sunnyvale 94086.
Eventually the rising tide lifts all boats. In 5-6 years, the guy who bought that $3M Eichler in Sunnyvale will be laughing because the same house will be with $4M.
If house price compounds at just 6% a year, it’d be already be 1/3 higher after five years. So that $3M shack people “overpay for” today could easily be worth $4M five short years later.
There is a price to pay for this “quick money” too. Back when homes around here cost $1M, it took 10-12 years to double to $2M. Upon selling, one got to shelter $500k from
Capital gains tax, plus some more (100-300k) due to commissions, home improvements etc.
But, if today’s $3M houses go to $4M in 5 years, and $6M in 12 years, then upon selling, the seller will pay a whole lot more in capital gains tax, because the exemption remains pegged at $500k.
In other words, people in, say their 40s prime working years, buying a 1700 sq ft “shack” for $3M in Sunnyvale and hoping to sell the same in 15 years and retire some place cheaper, will be in for a huge tax shock. If that house is worth $6-7M in 15 years, the tax bill could easily exceed $1M. This will eat into their budget in a significant way, wherever they may plan to go next.
Buyers, watch out if you are putting $600k down (20%) and taking $2.4M loan on a 10/1 interest only ARM. If the plan is to sell and go away in 10-15 years, it may not work out very well. Better have a plan go pay back that $2.4M loan…
You only pay capital gain taxes when you have gains. I don’t think it’s wise to be so worked up over the taxes to the point of avoiding the gain. You still get to keep 60% of it.
i am more interested what these people do to deserve these salaries consistantly over next 10 to 15 years to support such expenses.
and the financial system simply not sustainable. and this assuming climate change does not turn california into sub-sahara.
Speaking of buying the most expensive house in the neighborhood, recently the most expensive listing ever in the history of Sunnyvale came on the market: a Redfin agent listed this home for $3.6M.
I thought it would stagnate on the market for a month and seller would be forced to cut listing price. But no, it went pending in 5 days!!! Wonder what it actually sold for…
On the contrary, it may be a big worry for home sellers in Silicon Valley going forward. President Biden has proposed to increase the Federal long term capital gain tax rate to 40%. Coupled with CA capital gains tax rate of 10%, and real estate commissions of 5%, sellers will lose 55% on any gains beyond $500k. Quite disastrous…,
40% capital gain tax will kill the Real Estate Market in California and other coastal states but not in inland areas. The properties in the inland area generate income, they do not generate much capital appreciation anyway. But, the properties in the coastal regions are invested mostly for capital gains. Too bad for Bay Area Real Estate, 40% capital gain is too bad for BA real estate.
Quite right. I had this insight about 5-6 years ago that longevity in career is more important than burning out by aspiring for quick raises and promotions. Making a steady salary for 30 + years with 2-3% annual increments is better than aspiring to big pay hikes by job hopping only to lose much of the increment in taxes and burn oneself out in 10-12 years.
They are cash flowing nicely and my monthly payment kept on reducing with refinance, so I changed my stance. Instead of giving my hard earned dollar to realtors and uncle Sam, kept to cash flow into retirement.
This is exactly why inventory of homes for sale in Bay Area is so low:
First of all, there is no more land remaining to build SFH in prime South Bay and Peninsula areas
home owners are completely disincentivized to sell because of following reasons:
A) Super low interest rate that almost all home owners are refinanced into
B) cap on property tax, thanks to prop 13
C) High real estate commissions (5% of proceeds)
D) High capital gains tax rate beyond initial 500k gains. It used to take a decade to reach 500k in gains, but now will happen within 4-5 years because the base price has exceeded $2M in most nice areas
E) decent rental cash flow
So the only homes selling are due to death or divorce of homeowners, and maybe few recent investors cashing in.
$2.56M for 1200 sq ft cubby hole in West San Jose!!
Same house had sold in 2018 for $2M, which itself seemed like a frothy peak price. Within 3 years, has sold for almost 30% more - crazy
The 500K gains replaced exchange provision where a person could buy a new primary home and move equity from old home to new home. Much like 1031 exchanges are allowed for rentals.
Anyway, the prices of BA real estate seems to have escaped the lure of tax benefits.
First mover advantage 