After much worry, press coverage and early morning politics the country narrowly avoided the “Fiscal Cliff”. The new law preserved most of the tax breaks and incentives critical for homeowners. The $250/$500k capital gains exclusion for the sale of a principal residence remained in place and the capital gains tax rate stayed at 15% for individuals making $400,000 or $450,000 for couples. The mortgage interest deduction also remained intact, at least for now.
But this is all 2013 news — what about 2012? If you would ask us what was the most significant factor driving the local real estate market we would say that it was a shortage of inventory. For most of the year the market was hovering between 1 and 2 months of inventory. Multiple offers were commonplace and fierce competition between buyers drove prices up to new record highs all around the Bay Area. The median sales price in Palo Alto reached $1,726,750 for an 11.0 percent increase over the last peak of 2007-2008. Year-over-year the median home price jumped by unprecedented 20.9 percent.
The uncertainty about the tax policies after year-end and the anticipation of the 3.8% Medicare tax on capital gains drove some sellers to close before the end of the year. Forty one homes went to the new owners in December 2012 while only twenty homes changed hands in December a year earlier.
The buying frenzy was fueled by the booming local economy and by record-low interest rates. In 2012, Silicon Valley produced the largest IPO in the history of the markets (Facebook’s IPO raised more than $16B ), and also saw the ascent of Apple Computers to the status of the most valuable company in the world. Beyond these two highly publicized examples, many other Bay Area businesses had a successful 2012: the unemployment rate in Palo Alto stood at 4.1 percent by the end of the year. Neighboring cities like Mountain View, Los Altos and Menlo Park also experienced unemployment rates well below California and national averages (5.7, 3.9 and 5.0 percent respectively).
Mortgage interest rates continued to decline through the year, boosting home affordability across all price ranges. According to Freddie Mac’s Primary Mortgage Market Survey, the 30-year fixed mortgage rate averaged 3.34 percent during the first week of 2013. At the same time last year, the average mortgage rate was 3.91 percent and 4.77 percent two years ago. Jumbo loans, the loans above $625,500, are making a comeback too. In Santa Clara County the share of jumbo loans increased to 18.3 percent from 11.2 percent last year according to DataQuick. At the same time, the spread between the interest rates for jumbos and the rates for smaller loans has narrowed to as little as a quarter of a percentage point, making them a less costly option for homebuyers.
The outlook for 2013 is very positive. While we expect the number of homes available for sale to increase, there seems to be no shortage of committed buyers and the sellers’ market will continue for the foreseeable future. The prices will continue to grow but at lower rate than in 2012. The current price surge was driven by the demographic change in the type of the buyers and will be capped by the income growth of this group.
Since the crash, the improvement of the local real estate markets in and around the Bay Area created numerous opportunities for people to move up and invest in real estate, both residential and commercial. If you are planning to buy or sell this year, now is the time to pick the best strategy for you and your family.
Michael Talis is co-owner of TALIS Real Estate.