The DeLeon Insight September 2022

Market Conditions By City

$10,000,000

$9,000,000

$8,000,000

$7,000,000

$6,000,000

$5,000,000

$4,000,000

$3,000,000

$2,000,000

$1,000,000

$0

Average sale price for single-family homes from 1/2021 to 8/2021, compared to the period from 1/2022 to 8/2022.

Average Sale Price

1/2021 - 8/2021 1/2022 - 8/2022

Price/Square Foot Ratio

$2,500

$1,000

$500

Price per square foot ratio for single-family homes from 1/2021 to 8/2021, compared to the period from 1/2022 to 8/2022.

1/2021 - 8/2021 1/2022 - 8/2022

DeLeon Realty, Inc.

DRE #01903224

Managing Broker: Michael Repka

WE ARE LOCATED AT: 1717 Embarcadero Road, Palo Alto, CA 94303 650. 543. 8500 | DELEONREALTY.com 中文服務 | 650.785.5822

Founder — Ken DeLeon CEO & General Counsel — Michael Repka Corporate Counsel — Colette Thomason

CONTRIBUTORS: Ken DeLeon (DRE #01342140), Michael Repka (DRE # 01854880), Colette Thomason, David Tobener, Pamela Tao, and Stephanie Sham

Table of Contents

04 06 09 12 13

Will Mortgage Rates Continue to Spike Upward?

By Ken DeLeon Tax Talk - Severing California's Tax Nexus

By Michael Repka, Esq. LL.M. (Taxation) NYU School of Law

Gems of the Silicon Valley Restaurant Scene

By David Tobener Seller Financing: Just One Method to Creatively Structure a Real Estate Sale

By Colette R. Thomason, Esq.

Legal Eagle - The Hidden Cost of Prop 19

By Michael Repka, Esq.

Contact Ken DeLeon for exceptional buying opportunities. 650.543.8501 | DRE #01342140

Contact Michael Repka to learn about our Platinum packages and incredible listing services for Sellers. 650.900.7000 | DRE #01854880

DISCLAIMER:

As prominent members of the real estate community, we respect all pre-existing listing agreements. If your home is currently under a listing contract, please do not construe this publication as a solicitation of that listing. On the other hand, if you have not yet selected an agent, we urge you to consider our team's resources and design acumen, as demonstrated in this proprietary publication, which was created completely in-house by our talented marketing team.

Advertising. All rights reserved. DeLeon Realty is not a law firm and the publica tion of this information does not create an attorney-client relationship with this brokerage or any of its members. Likewise, the material in this publication does not constitute a solicitation and is not intended to provide legal advice. The content in this publication is informational only and may not reflect current legal developments. This publication should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your juris diction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter. DeLeon Realty expressly disclaims all liability with respect to actions taken or not taken based on any or all the contents of this publication. See also deleonrealty.com for additional disclaimers.

WILL MORTGAGE RATES CONTINUE TO SPIKE UPWARD?

By Ken DeLeon

The housing market, both in Silicon Valley and around the nation, was hitting an all-time high in pricing and demand at the end of 2021. Yet this frenzied housing market, both locally and nationally, experienced a rapid reversal and conditions have quickly pivoted to becoming a buyers’ market.

This change was precipitated in large part due to rapidly rising mortgage rates. Many articles have discussed how the average 30-year conforming mortgage jumped up from 3.11% at the end of 2021 to 5.22% now. Neither mortgage rates nor the federal funds rate have risen this quickly since the 1980s.

This rapid rise has done more to cool buyers’ interest than the declines in the stock market. Home buyers generally care more about the amount of their monthly mortgage payment than they do the exact price of their home. The reality is, how much house you can afford is directly related to your monthly mortgage payment. While home prices generally fluctuate by several percent between a sellers’ or buyers’ market, there can be a much greater variance in mortgage rates.

In recent weeks, mortgage rates have somewhat declined from their new peaks and these declining rates have helped the housing market regain some momentum. The question is whether mortgages will likely increase or decrease going forward, as their trajectory impacts the housing market.

I, along with several economists, actually feel that mortgage rates will decline in 2023. This statement may sound surprising given that the Federal Reserve will continue raising the Federal Funds rate throughout the rest of the year. The Federal Funds rate, currently at 2.5%, is the rate that banks charge themselves when borrowing money from each other. The Federal Funds rate also determines the prime rate, and if the Federal Funds rate goes up, so too does the interest rate for credit cards and car loans.

Conversely, mortgage rates are market-driven and are determined by the bond market. Expectations of a rising Federal Funds rate have been incorporated in bond markets for several months now and when the Federal Reserve does a planned increase, that generally has no impact on pricing for the 10-year bond.

Additionally, in times of economic uncertainty such as we are experiencing now, many investors take funds out of the speculative and volatile stock market and transfer these funds into the bond market, bringing bond yields down. I feel that the mortgage rates spiked up more than were warranted at the start of the year, and the recent decline in mortgage rates is due to the 10-year bond’s return dropping from over 3.49% in June to 2.89% as of the writing of this article. This drop resulted in a commensurate drop in mortgage rates over the last two months.

Most economists expect inflation to ease and the Fed’s rate increases to end as it pivots to easing monetary policy in 2023 as the need to sustain economic growth becomes paramount. While I project the Federal Funds rate to fall from a peak of 3.5% at the start of 2023 to 1.5%, I feel that market-driven mortgage rates will continue to decline, or stay stable, for the next year, at which time they may go up as the economic recovery may be in full swing by then.

Given that this dip presents a rare opportunity to purchase a Silicon Valley home for hundreds of thousands below what a similar home would sell for in the spring, I recommend that clients purchase a home now at a discounted price, use an adjustable-rate mortgage for 7 years, and then refinance to a 30-year mortgage when rates decline in the future.

Additionally, through my sole focus on buyers, I always know what bank offers the best mortgage rates each week. These rates are much lower than general market rates, as I focus on the most aggressive lenders with the best rates, and I share these referrals with my clients. To get these referrals, please reach out to me at Ken@DeLeonRealty.com or 650.543.8501. Some of the exceptional rates I can steer you towards include:

7-year 10-year

TAX TALK - SEVERING CALIFORNIA'S TAX NEXUS

California’s Franchise Tax Board has a well-deserved reputation for being both sophisticated and aggressive. Beyond just having some of the highest taxes in the country, California is very proactive in making sure that it collects every dime.

Naturally, these exceptionally high taxes, combined with a very high cost of living, have caused many Californians to reconsider where to hang their hats. This is particularly true now that post-COVID work arrangements are making it far more realistic to work from anywhere. Additionally, the number of Californians that have decided to sell their Silicon Valley homes and move to other areas with a lower cost of living and lower state income taxes have contributed to the weakening real estate market here, and rapidly appreciating markets elsewhere.

California’s View on Residency

Like most states that impose an income tax, California taxes everyone on income that is directly connected to California. This is true for both residents and non-

residents. For example, if you lease your California home, then the state will tax the rental income irrespective of where you live. Similarly, if you work in a store in California, you will be subject to tax on that income even if you live in Nevada, Arizona, or Oregon.

On the other hand, California will tax its residents on all income, even if it is earned out of state. Importantly, this includes income from intangibles, rentals, and other investments. Thus, there is significant benefit derived from moving out of state - especially if the state imposes no income tax, such as Nevada, Texas, Washington, or Florida (among others).

Severing Ties

Determining California residency is very much based on a facts-and-circumstances test. Put simply, the state will consider you a resident if your ties to California are stronger than your ties to any other state, or if you leave on a temporary basis with the intent to return. On the other hand, if you leave the state and don’t intend on coming back, you will probably take the

By Michael Repka, Esq. LL.M. (Taxation) NYU School of Law

steps necessary to avoid residency status. Some of the factors that California considers are:

• Amount of time in California vs. in another state;

• Location of your spouse and children;

• Location of your principal residence;

• Driver’s license, vehicle registration, and voter registration;

• Professional licenses;

• Banks, doctors, and other professional services; and

• Maintaining country club and other social memberships.

Sellers who think all they have to do to avoid California tax is buy a home on the Nevada side of Lake Tahoe and get a Nevada driver’s license are likely to learn a hard lesson. However, people who do decide to relocate out of state and take the normal steps may find themselves in a rapidly appreciating area with low to no state income tax. Given that their maximum tax rate

in California is 13.3%, and there is no preferential rate for capital gains, the savings could be very significant.

If you are interested in learning more about selling your home and moving out of state, including an introduction to a pre-screened Realtor® in these locations, legal insights on severing your California ties, and even, possibly, a visit to these areas via private plane, please contact Michael Repka at 650.488.7325.

DeLeon Plane - Piper M600 Turboprop

GEMS OF THE SILICON VALLEY RESTAURANT SCENE

By David Tobener

The Bay Area is known for its incredible restaurant scene, with some of the world’s best chefs and restaurateurs setting up shop throughout San Francisco and the East Bay.

Silicon Valley has benefitted from this gourmet boom, as a number of renowned restaurants have opened and thrived throughout the area. If you were to peruse most “Best Of” lists of Bay Area restaurants, many would be found in Silicon Valley. Some of them are Michelin-rated, while a few have even earned Michelin stars.

Let’s take a look at a few Michelin-rated restaurants that you might find in your own backyard:

offers an enticing selection of Southern Italian favorites sure to satisfy even the most discerning foodie. And aside from its place in the Michelin guide, Doppio Zero is also one of the few restaurants in California to be certified by the Associazione Verace Pizza Napoletana, an international organization dedicated to cultivating the art of the Neapolitan pizza.

Village Pub: This Woodside gem has been a huge success since opening its doors in 2001, earning a Michelin star for 12 consecutive years. The sophisticated setting belies the approachability of the menu, as Village Pub offers exciting twists on old favorites. Plus, connoisseurs are sure to appreciate the wine list here, as it is one of the best in the entire Bay Area.

Chez TJ: This storied Mountain View eatery enjoys an incredible ambiance thanks to its location inside of a circa-1894 Victorian home. The menu offers contemporary French cuisine served across numerous courses in a chef’s tasting menu. Reservations must be made in advance, and the restaurant will take into account any dietary needs and restrictions. A Bay Area favorite for decades, Chez TJ is the recipient of a Michelin star.

Doppio Zero Pizza Napoletana: Staying in Mountain View, this Michelin-rated restaurant turns pizza into an art form. But don’t come just for the pies – the menu

Sushi Shin: One of the many new restaurants that have contributed to the revitalization of downtown Redwood City, Sushi Shin opened in 2020 and has already received a Michelin star. Chef/owner Jason Zhan honed his craft by learning under sushi master Hideo Kuribara. If you’re lucky enough to get a seat in front of the chef, be prepared for a spectacular show put on by a true master of his craft. Fresh, meticulously sourced seafood and a warm, serene ambiance make for an unforgettable dining experience.

Protégé: With a Chef and Master Sommelier who both trained under Thomas Keller at The French Laundry, it’s no wonder that Protégé has earned a Michelin star. Described as “edgy cooking with panache” by the Michelin guide, the restaurant offers a 7-course tasting menu as well as an a la carte lounge area. Reservations may be hard to come by, and can only be made through email.

Ken DeLeon

Purchase Your Dream Home With Silicon Valley’s Most Qualified Buyers' Team

Ken and Alex partner to provide their buyers with the greatest level of expertise in all facets of home purchasing. Please call Ken at 650.543.8501 or email him at ken@deleonrealty.com to learn about how they can help you find your dream home.

Alex Wilbur DeLeon

SELLER FINANCING: JUST ONE METHOD TO CREATIVELY STRUCTURE A REAL ESTATE SALE

By Colette R. Thomason, Esq..

Seller financing can benefit both buyers who are faced with rising interest rates and sellers who wish to make a sale more appealing to buyers while enjoying significant capital gains tax savings. But how does it work? Most real estate agents shy away from these outside-the-box concepts because they lack the legal expertise to structure such a deal. At DeLeon Realty, we have in-house legal counsel and financing professionals to help both buyers and sellers understand the ins and outs of seller financing.

In traditional seller financing, a buyer provides a seller with a promissory note for all or part of the purchase price that is secured by a mortgage or deed of trust on the property. The buyer takes title to the property while the seller receives a portion of the sales price at closing, depending on the amount seller requires as a down payment, with the rest paid to seller over a period of time. This type of loan is often referred to as a purchase-money mortgage.

If the buyer were able to secure a first mortgage with another lender and needed help with a down payment, some sellers may be comfortable with financing a second mortgage should the first lender approve such an arrangement. In this case, the seller gives up their senior lien position for a junior position and in turn should require a higher interest rate to offset the risk of loss in a foreclosure. Foreclosing on a private loan is easier than most think because a hired trustee would complete the foreclosure process (i.e., trustee’s sale) for the seller from beginning to end; however, a seller’s risk varies depending on the amount of equity left in the home and the senior versus junior lien position, among other factors.

A seller can decide the level of creditworthiness a buyer must possess, what documents a buyer must provide to evidence their ability to pay the loan, and what interest rate to offer based on the level of risk for a particular buyer. Sellers can also choose the

term of the loan, such as a five-year term in which the entire balance is due at the end of five years in anticipation of the buyer refinancing before then, or a longer term such as thirty years which could appeal to a seller if they prefer to spread their taxable gain over a long period of time. Payments may be interestonly, principal and interest, or they can vary through the life of the loan. On the flip side, a buyer may offer a financing proposal to entice a seller into accepting their offer with a quick closing.

A changing market can be a great time to think outside the box to help a home sell. While a typical agent is limited to standard forms, a real estate attorney has the ability to draft financing documents to protect their client’s interests. Michael Repka and Ken DeLeon are both well-equipped to help buyers and sellers decide if seller financing is the right choice. Please reach out to them to discuss your options and assess how seller financing may benefit you.

LEGAL EAGLE

THE HIDDEN COST OF PROP 19

By Michael Repka, Esq..

In the late 1970s, many Californians found themselves struggling to afford their homes due to rapidly appreciating real estate prices and proportional increases to real estate taxes, which were directly tied to the value of the property. Just imagine a school teacher that receives a 3% pay raise each year, but the value of their home is going up by 10% per year. With real estate taxes tied to the value of the property, it was easy to see the problem.

Howard Jarvis, amongst others, pushed for the adoption of Prop 13, which imposed a 2% cap on the amount that property taxes could go up each year unless there was change in ownership. Aimed at allowing “empty nesters” to downsize, Propositions 60 and 90 allowed for a once-in-a-lifetime transfer of the low tax basis provided:

• The taxpayer was 55 years of age or older;

• The new property cost less than the sold property; and

• The new property was in the same county or one of a limited number of other counties.

When the Realtor® community was pushing for the passage of Prop 19, it seemed like all of the focus was on the ways that Prop 19 expanded the application of Props 60 and 90. Namely:

• The transaction would not be disqualified if the replacement property was more expensive;

• The replacement property could be anywhere in the state; and

• The taxpayer could transfer their property tax up to 3 times in their life.

Thanks to these changes, homeowners gained flexibility and Realtors® gained more transactions and more commission. At first blush, everything seemed wonderful.

Loss of Inheritance Benefit

One major detrimental provision in Prop 19 is the significant restrictions (read: virtual elimination) of the ability to transfer the preferential tax rate to the taxpayers’ children or grandchildren. Under the old rules, a parent selling, giving, or bequeathing a property to their child would not result in an increase in the property tax. The child, or grandchild in limited circumstances, would continue to pay taxes at the same rate as the parents.

However, such a transaction under Prop 19 results in the property taxes being reset to fair market value unless the child is going to live in the home. Even if the child is going to live in the home as their primary residence, the benefit is still limited to a reduction from fair market value of not more than $1 million.

The elimination of this transfer of the property tax benefit will likely result in more homes coming on the market rather than remaining in the family.

Step Up in Basis at Time of Death

On the positive side, the person receiving inherited property is treated as if they had paid the amount that the property was worth on the date of death. This is known as the “Basis Step-Up.”

The elimination of capital gains and the preferential property tax rate may make selling a more attractive option than before.

JENNINGS

ARCHITECTURAL

Sep-21Oct-21Nov-21Dec-21Jan-22Feb-22Mar-22Apr-22May-22Jun-22

LOS ALTOS

$2,000,000 $3,000,000 $4,000,000 $5,000,000

Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22

LOS ALTOS HILLS

$2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000

Sep-21 Oct-21 Nov-21 Dec-21 Jan-22

Atherton

Sep-21 Oct-21Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22May-22 Jun-22 Jul-22 Aug-22

Los Altos

Sep-21Oct-21Nov-21 Dec-21 Jan-22Feb-22Mar-22 Apr-22May-22Jun-22 Jul-22Aug-22

Los Altos

Dec-21 Jan-22 Feb-22Mar-22 Apr-22May-22Jun-22 Jul-22Aug-22

$5,000,000

$4,000,000

$3,000,000

$2,000,000

$1,000,000

$0

MENLO PARK

Menlo Park

Median Sales Price & Price/Sq. Ft. Ratio

$2,000

$1,500

$1,000

$500

$0

Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22

Price/SqFt

MOUNTAIN VIEW

Menlo Park Inventory # of New Listings

0

Sep-21Oct-21Nov-21 Dec-21 Jan-22 Feb-22Mar-22 Apr-22May-22Jun-22 Jul-22Aug-22

$0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000

Median Sales Price & Price/Sq. Ft. Ratio

Mountain View Inventory # of New Listings Mountain View

$2,000

$1,500

$1,000

$500

$0

Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22

Price/SqFt

PALO ALTO

Sep-21Oct-21Nov-21Dec-21 Jan-22Feb-22Mar-22 Apr-22May-22Jun-22 Jul-22Aug-22

$3,000,000 $4,000,000 $5,000,000

$2,000,000

$0 $1,000,000

Median Sales Price & Price/Sq. Ft. Ratio

Palo Alto Inventory # of New Listings Palo Alto

$1,600 $1,700 $1,800 $1,900 $2,000 $2,100 $2,200

Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22

Price/SqFt

Sep-21Oct-21Nov-21 Dec-21 Jan-22Feb-22Mar-22 Apr-22May-22Jun-22 Jul-22Aug-22

PORTOLA VALLEY

Portola Valley

Sales Price

$1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000

Sep-21 Oct-21 Nov-21

SUNNYVALE

Portola Valley Inventory # of New Listings

Sep-21Oct-21Nov-21 Dec-21 Jan-22 Feb-22Mar-22 Apr-22May-22Jun-22 Jul-22Aug-22

Sales

$500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000

Sunnyvale Inventory # of New Listings Sunnyvale

Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22

WOODSIDE

$7,000,000

$4,000,000 $5,000,000 $6,000,000

$3,000,000

$2,000,000

Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22

Sep-21Oct-21Nov-21Dec-21 Jan-22Feb-22Mar-22 Apr-22May-22Jun-22 Jul-22Aug-22

Woodside Inventory # of New Listings

Sep-21Oct-21Nov-21 Dec-21 Jan-22 Feb-22Mar-22 Apr-22May-22Jun-22 Jul-22Aug-22