A Misleading Proposition 13

Catch-22, a novel by Joseph Heller, explored the absurdity imposed by governmental overregulation and war. Today, the term catch-22 has come to define any paradoxical situation in which the solution is impossible because of the rules inherent to the problem. For example, this might mean being unable to find your glasses because you lost your glasses and cannot see! This year’s Proposition 13 is a blind one with a very misleading title. For people with the desire to ever live in a home and raise children anywhere with good schools in the state of California, a more fitting name for this bill is “Proposition Catch-22.”

Not only does this proposition recycle the same name as the original 1978 Proposition 13– which was passed by about two-thirds of Californian voters in 1978 and limited property taxes to 1% of the purchase price and concurrently limited annual increases to no greater than 2% of a property owner’s current tax payment- but the 2020 initiative actually increases property taxes! It does exactly the opposite of what the original 1978 Proposition 13 stood for! This new bill is tricky the way it is named and tricky the way it works, but do not let these things fool you.

This is how it works: the new 2020 Proposition 13 essentially imposes $15 billion in bonds on residential property owners. With interest owed, this scheme will actually cost residential property owners and in turn those who rent residential property roughly $26 billion (see chart below) over 35 years.

California suffers from one of the highest costs of living anywhere in the nation. Rents are skyrocketing. The more property owners are taxed, the more rents must be increased. Recently passed AB 1482 established a rental increase cap at 5% a year plus inflation for a total amount up to 10% per year. Higher taxes equals higher cost of living equals higher inflation equals higher rents. The new 2020 Proposition 13 means rents can and will be raised to pay for this added expense. Homeowners who live in their homes but are not fortunate enough to also own rental properties will absorb this entire burden themselves.

Given California’s astronomical cost of living, younger families who might have children are typically unable to move to the more desirable coastal areas and city neighborhoods with better schools. Younger people who already live in these areas often cannot afford to have children, assuming they can even afford to move out of their parents’ houses. The simple ability to raise kids in areas like Coastal Orange County or Los Angeles with good school districts is seen as a huge sign of success! Having a dog is a bonus. (Cats don’t count, sorry.) Since there are not enough kids growing up in areas like Coastal Orange County, these high-ranking school districts are not getting funding from the state because the state funding is allocated per student. Since there aren’t enough students, local Orange County school districts are forced to close some of the highest-ranking schools in the nation. And the state’s answer is to make it more expensive to live here by taxing us even more?? The situation is a catch-22 for young families who want to rent or own a home and raise kids anywhere in California with high-quality schools.

It doesn’t work for enough young families. Why not use a portion of the $21 billion surplus in the state’s general fund to pay for this? Borrowing the $15 billion nearly doubles the cost over time!

Placing this bond measure in the cycle of proposition names to coincide with the number of the original 1978 Proposition 13 is trickery at best. The new 2020 Proposition 13 is also convoluted to prefer union labor contract bidders over the free market thereby wasting taxpayer dollars. This cute little provision is hidden in the bill much like the link to cats doing stupid things is hidden in one of the above paragraphs. Californians have voted for billions of dollars in school funding and renovations over the past decade. We’re reasonable people, but don’t try tricking us by sneaking things into the bill that are not included in the Official California Voter Information Guide and by assigning it the sacred proposition number 13, which we have come to know and love.

The full text of the Fake Proposition 13 can be read here.

The Crab Cooker: New Foundation, New Future: Part Two

(Please See Part One Here)

Legacy of Family and Food

While we’ll miss seeing Bob Roubian in person at the new restaurant, his spirit undoubtedly lives on with The Crab Cooker and with his loving family, who affectionately refer to him as “Papa Fish.” Son-in-law and current owner, Jim Wasko, a former naval reconnaissance pilot, first became involved with Crab Cooker in 1990. That was when he and his wife, Ronnie, moved from a base in Guam to The Pacific Missile Test Center in Point Magu, California. In those days, they would take the kids down to Newport Beach to help their grandfather (Ronnie’s dad) with the restaurant. Their kids, Jessie, 25, Claire, 29, and Jimmy, 32, would initially put on aprons, pass out menus, and do whatever they could, just as Ronnie started doing when she was about five-years-old.

The family grew more and more attached to the restaurant and their beloved customers. When Jim concluded his final tour of duty, rather than getting involved with commercial airlines, he decided to focus more on Crab Cooker by spearheading the project to open its second location in Tustin. And thank god for that! Those of us who can’t wait another day for our clam chowder in Newport Beach can go and get it there!

If you have not tried Crab Cooker’s clam chowder, you have not tried the world’s best. It’s a tomato-based blend of Manhattan and New England styles with generous portions of quahog clam strips. Ronnie and Jessie still make all the seasoning for it in a number 10 can where they put, “well… all the secret spices,” Jim says with a huge smile, but briefly stops the conversation there. He and daughter Jessie both look at each other and laugh. “We could tell you,” he keeps laughing, “but we’d have to kill you.” Two 60 gallon steel boilers with double layers for even heat distribution provide 120 gallons of clam chowder every day, seven days a week.

Free oyster crackers and Tabasco sauce complement the clam chowder tableside. The family recently lost their oyster cracker supplier, so they’ve started making their own in house. Amongst several job titles, Jessie serves as head baker. She chuckles when her father refers to her with that job title, making it obvious that head baker is only one of the many things she does. Jessie explains that she had to come up with the new oyster cracker recipe from scratch, but knew to stick with her grandfather’s formula: “Keep it consistent. Keep it simple so that it’s not complex and people can’t screw it up if you lose one person.”

Past contract bakers, cooks, and suppliers have either screwed it up or tried cheating The Crab Cooker. This is why the smoked albacore, smoked salmon, crab cakes, and fresh fishermen’s bread is now made in house seven days a week at Crab Cooker Annex in Newport Beach. But the family is always loyal to those who do it right. They’ve had the same produce supplier for a quarter century and the same fish supplier for three generations.

Jessie is an Oregon State graduate with a degree in business. She stands before several racks of her recipe for fresh dough balls about to go into the oven. Her eyes grow wide with excitement when moving onto a discussion of their fresh fish and suppliers, “They know us and we have a great relationship with them. They call us saying, ‘We’ve got an amazing lingcod in. You guys are gonna die for it! You really need to jump on this.’ And we trust them and we go, ‘Yep! Yep!’” Jessie nods her head up and down enthusiastically. “My favorite dish would be the lingcod. When we get that in, that’s what I’m having. Hands down.”

“You can’t make a bad piece of fish taste good- even if you’re the best French chef in the world. You can only screw up a good piece of fish. That’s why we just lightly seasoned it and let the flavor of the fish come out,” Jim explains. Jim and his family are now running the show. All five of them have been involved and stay involved in the business. His son, Jimmy, a marine for 6 years, graduated from Penn State with a degree in hotel and restaurant management. Just like his sister, Jimmy spends his time in all aspects of running the family restaurant. Jim’s middle daughter, Claire, followed in her father’s footsteps and graduated from the Naval Academy in 2012. Her husband is also a naval officer. They recently welcomed their first baby into the world. Claire manages the restaurant’s marketing and social media accounts.

 

Consistency, Simplicity, and Authenticity

Now at the helm of the restaurant, Jim credits Bob Roubian with being a great mentor. “It wasn’t about the dollar to him. It wasn’t about the business aspect. It was about the people. That was drilled into me from the first time I met him. I said, ‘there’s something profoundly different- something profoundly unique about him.’ We’re following Bob’s principles, his guidance, and his leadership that made it a success. And that revolves around two things: quality and people. There’s also the principles of: consistency, simplicity, and authenticity. I think people these days that want to start a business- they complicate things. And Bob was not complicated. He knew what he wanted in life. He knew what he enjoyed. And within that he created such a unique culture. His employees loved and cherished him and respected him as to where they would stay for 50 years working here. His customers loved and cherished him. He loved everybody, and everybody knew it!”

Roubian first opened shop in 1951 with 16 competitors all within a stone’s throw of the historic Newport Beach fishing dory fleet. Originally, he gave his restaurant a simple name: Seafood Varieties. He would set up outside on the sidewalk, steaming crab and fresh local lobster. The people on the street would say, “Let’s go to the place with the crab cooker.” The Crab Cooker name stuck, so three years into it, Bob adapted that name.

Bob started out frying his fish because that’s what all the competition was doing. Having grown up the son of a fisherman and contractor who would bring home leftover lumber to barbeque fish with, Bob quickly understood that frying fish was robbing it of its flavor. So, he went back to what he knew. “Common sense is not so common- improve your mind, eat lots of salmon,” Bob would always say. The mesquite grilling style paid off and Bob’s business model worked. Of the 16 seafood restaurants initially surrounding the historic dory fleet in Newport Beach, The Crab Cooker was the last one standing in the end.

At the Crab Cooker Annex in Newport Beach, Jim stands with crossed arms beneath an archway with the bold words painted overhead: “through these portals pass the most beautiful fish in the world.” Jim’s favorite dish? Swordfish with cheese potatoes and coleslaw. “The one fish that’s kind of tricky is swordfish. I inspect them personally. Before accepting one, they take a piece and cook it for me and I give them thumbs up or thumbs down. His daughter, Jessie, and son, Jeremy also help with this task and many more. “All the fish is checked every day from our filet guys. If there’s any question, it goes back. There’s no such thing as ‘Is it good enough?’ But is it the world’s best? Would you serve it to your grandmother for her last meal?”

A new Crab Cooker is rising from the sandy shore with the next generation in place to hold the course and trim the sails into many more luminous sunrises. And with that, future customers are guaranteed the continuation of no-nonsense quality from Crab Cooker, which we have all learned to expect.

The Crab Cooker: New Foundation, New Future: Part One

An Enduring Spirit

Unless you’ve been living under the sea, you’ve already noticed the iconic Newport Beach Crab Cooker had to be demolished due to catastrophic foundation damage caused during construction of a neighboring condominium complex. Despite all efforts to save the historic 1930 structure, originally home to Bank of Italy and then Bank of America before becoming The Crab Cooker in 1951, the foundation on the sand could not withstand the forces required to repair it. When they attempted to raise it, the foundation further cracked like a customer would do to one of their king crab legs.

Similar to a legendary sailing ship, the structure continued listing and sinking until deemed unsalvageable in 2016. The permitting process for rebuilding spanned a two year period along with roughly $100,000 worth of repeated inspections to remain safely open. During this time, on December 15, 2017, friends and family also lost Crab Cooker’s beloved founder, Bob Roubian. The captain goes down with his ship.

But the spirit of Crab Cooker is not lost!

Love keeps all good things alive. Current Crab Cooker owner, Jim Wasko, says about his father-in-law, “Bob loved The Crab Cooker and he loved his customers. He absolutely adored them. His favorite saying was, ‘I’m ninety-years-old and I’m still on a honeymoon with The Crab Cooker.’” Meeting with Jim and his daughter, Jessie, to discuss the future of the building and restaurant, their love of family, friends, and fish is immediately clear. On a gloomy day when overcast skies outside Crab Cooker Annex on Newport Boulevard and 22nd are stifling the joy of the general beach-going population, they are each bright-eyed and warm. Both are full of energy, yet their voices are entirely relaxed.

The New Building

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On the table is a stack of blueprints thicker than all the nautical charts required to sail a vessel around the world. Hanging on the wall above is a rendering of the new building. It screams Crab Cooker in all its glory with the signature fire engine red walls and the quirky “Don’t Look Up Here” fish sign perched confidently up top. “The city elders, especially Mayor Dixon, have been fabulous to work with in every aspect of the rebuild,” Jim says. “Our goal was to go ahead and keep as much of the neat things that people recognize and recreate that in a new building that meets today’s codes. I think we’ve been pretty successful at it.”

Indeed they have!

The Crab Cooker is coming back bigger and stronger than ever before! Paul Callison, job superintendent with Richard and Richard Construction Incorporated, explains the new foundation will sit atop 20 concrete pilings pounded nearly 70 feet straight down into the ground. Although a technicality with the plumbing caused some unexpected delays, re-opening is now expected in late 2019 or early 2020.

Paul Callison and Jim Wasko

Strikingly similar to the old building, the new building will have some interesting features. Numerous aspects of the rebuild required heritage site exemptions, such as including the long green bench outside where sandy-toed surfers eat their clam chowder next to local families and visitors from all over the world- all beneath the shade of the classic green and white striped awnings. Because of newer codes, the awnings will now be three feet higher rather than only slightly overhead. In fact, the entire building will be five feet higher. The new building will also feature open- beamed ceilings and a patio-type area with one wall opening to Newport Boulevard providing fresh ocean breezes and some promising people watching. A bunker-like second story will run along the northern rooftop, softening the appeal where the new structure meets the neighboring development, and providing both office space and employee break areas. Interior dining areas will feature booths instead of wooden tables and chairs, but will seat about 130 people like before.

The 12-foot great white shark caught off Newport Pier in 1960 will be making a comeback. So will the olive wood mermaid- once stolen during a 1970 break-in and then held for a $500 ransom. The wooden door hand-carved by founder Bob Roubian is returning. Four outdoor lighting sconces from the 1800s are receiving a restoration and will adorn the building’s perimeter. The skilled cooks will still be protected from customer drool behind an interior glass wall as they prepare “the world’s best fish” on mesquite-fired grills. Most of the fish, portraits, paintings, and nautical curiosities are also returning.

(Please Click for Part Two!)

Tequila and the Housing Market

Earlier today, the United States slapped a 5% tariff on all imported goods from Mexico. Unfortunately, good people, this means the price of tequila is going up. There is reason to celebrate, though, because (aside from the highest-end properties) Southern California real estate prices are also rising.

Our favorite data analytical firm, Core Logic, has just released the latest numbers. So pour yourself a couple ounces of the good stuff, and let’s get up to speed on what’s happening.

Prices are up significantly. The median price of all new and existing homes sold in Southern California for April 2019 was $527,500, which is 2.4% higher than March’s median price of $515,000. This price increase is 300% greater than the average .8% March to April gain as measured since 1988.

The number of sales is also up by an impressive amount. In the six county region of Southern California that includes: Los Angels, Orange County, Riverside, San Bernardino, San Diego, and Ventura, 20,074 new houses and existing homes sold in April 2019. This number represents an eyebrow-raising 11.5% month-over-month gain from March 2019 when 17,985 homes were sold. Granted this stunning turnaround, the April 2019 numbers are still down 3.3% in the year-over-year comparison with April 2018.

Throwing out the 2003-2006 housing boom resulting from sketchy lending practices, the April 2019 sales numbers remain 5.1% below the average measured since 1988. While the uptick in sales activity is evidence of a rebound, this does follow 9 months of year-over-year sales declines.

The market is like an ice cube dropped into a margarita that pops back to the top again.

Andrew LePage, a Core Logic Analyst and guy we might assume drinks some high-end tequila comments, “April’s decline [in sales] marked the smallest annual decrease since late August when the region began logging annual sales declines each month. April’s smaller annual sales decrease, coupled with an above-average month-to-month increase in sales, suggests declining mortgage rates and increased inventory this spring helped attract buyers. This might include people who backed out of a tighter, more frenzied market last year when rising prices and mortgage rates priced out some and made others worry about buying near the peak.” LePage doesn’t bring it up, but these numbers are getting hammered by the inclusion of newly-constructed homes. Sales of new homes have fallen by a glass-shattering 50% from their average measured since 1988, largely because new homes are more expensive than resale homes.

“Last month, four of the region’s six counties posted annual increases in their medians, ranging from 1.5% to 3.6%, while San Diego and Ventura counties had no change. The slowdown in price growth and sales over the past year suggests that despite a healthy economy, the cost of homeownership has outpaced incomes for many,” LePage elaborates between sips. “Most buyers don’t have the option of turning to the sort of high-risk mortgages many used to stretch beyond their financial means during the last housing boom, keeping upward pressure on prices. Looking ahead, a variety of factors including inventory levels, mortgage rates and job growth will help determine the course of home prices during the spring-summer home buying season.”

In Orange County, 2967 homes sold in April 2019. This represents the highest gain in all six counties with 17.6% more homes sold than in March 2019. For April 2019, the median sales price in Orange County was $735,000, an impressive 2.1% higher than March 2019. Measured year-over-year, Orange County home prices are up 2.8% from April 2018.

(The tequila theme is only for fun. The author is happily sober, so please give him a shout with any real estate questions you might have!)

Should I Buy a Brand New Home?

While having a real estate agent is not required for buying a newly built home, an agent costs you nothing and can keep you out of contractual trouble while saving you thousands in negotiating terms and upgrades. An agent can also guide you through the plusses and minuses of buying a new home verses an existing one, tour you through a number of each, and help you make a more informed decision. But is buying a new home a good idea? Well, it depends. Here, we explore the advantages and disadvantages of this approach to property ownership.

Advantages of Buying a New Home:

Origin of Community: In a new neighborhood, everybody is relocating around the same time. Many neighbors are also in the same stage of life, which might mean starting out as new families, settling in for retirement, or both of those right across the street from one another. Focusing on customizing their new homes and landscaping, neighbors often compare notes, help each other as needed, and make new friends in the process.

Modern Design Choices: Builders may offer several models to choose from so buyers can choose the ideal layout. Most new homes feature open-concept designs that lend to easier entertaining. Options exist on items like flooring, countertops, appliances, and hardware to match your tastes. Must have the grays and whites? Done. Want that upstairs carpet to be pink? Sure thing.

More Energy Efficient: Newer homes are built to the latest code standards, which means dual-paned windows throughout, better insulation, and more efficient heating and air conditioning units. New California Law ensures all new homes built from 2020 onwards will have solar panels to cover roughly one third of their energy consumption.

Less Maintenance: New homes are, well… new. Aside from some initial glitches during the break-in process, you have a new roof, new plumbing, new wiring, new lighting, new appliances, new paint, new insulation, new hardware, new flooring, new everything! You should expect few if any major surprises and enjoy ultra-low maintenance concerns for years to come.

Warranty: Different builders have different warranties, but each usually extends ten years or more on all major structural components and one year or more on everything else. Should issues arise during these timeframes, the builder is obligated to address each of them for you.

Disadvantages of Buying a New Home:

Expensive: New homes are not cheap. The costs of building supplies and labor are always increasing. Fall in love with the model home they showed you? Better prepare to make it rain for all those upgrades that caught your attention such as: window treatments, better appliances, hardwood flooring, higher quality fixtures, quartz countertops, recessed speakers, crown molding, and on and on. Most of the time, you ’ll also be expected to pay for designing and landscaping your own backyard (if you have one.) Impressed by the model home’s in-ground hot tub, waterfall feature, palm trees, ferns, flowers, BBQ area, stonework, statues, and lighting? That’s all extra.

Mello-Roos: This point is going to sting. Cities, counties, and special districts (such as school districts) add extra property taxes on newly constructed homes to finance community improvements like: roads, schools, police stations, libraries, fire stations, public parks, ambulance services, baseball fields, and basketball courts. And these projects are costly! New home buyers in California will discover their property taxes are as much as three or four times greater than had they purchased in an older established neighborhood! A new online Property Tax App enables you to look up an address in Orange County and check on its property tax breakdown. You can try it out and look up your current home to see where every single dollar of your property taxes is going. This app does not yet include every subdivision or incomplete homes, so it’s incredibly important to ask the sales agent or your realtor what the total percentage of taxes will be on the new home before making a decision to purchase.

Location: In Orange County, new developments are typically farther from the most desirable areas as these are mostly already developed. This means you probably won’t be walking or riding your bike to the beach. It could otherwise mean longer commutes to downtown and work. And in terms of creating wealth down the line, the land value of the best locations is what appreciates the most.

Time: According to the United States Census Bureau, it takes an average of seven months to build a new home. A single custom home could take even longer.

Noise: Buying a new home means living in a construction zone with all the dust and noise and heavy equipment involved as the builder completes the phases and neighbors work on their landscaping at around the same time. But after awhile, you’ll get used to the feeling of dirt in your teeth.

Contracted Restrictions: New home contracts heavily favor the builder. The clauses often stipulate the following: completion time can be delayed without compensation, different materials and colors can be substituted, various problems can arise, and final dimensions and square footage can vary by as much as 100 square feet. Also, these contracts carry habitation restrictions. For example, you most likely will not be allowed to lease the property to somebody else for the first two or three years of ownership. You’ll want to make sure you review the contract thoroughly with your real estate agent and attorney (we have both on our team!)

Still considering buying a new home? Make sure the first time you visit and view a new development you arrive with your real estate agent. Otherwise, they will not allow you to have an agent as your representative.

Yes, they can do that.

If you are already stuck without an agent because you went the first time on your own, be careful waiving contingencies, especially the appraisal contingency. Know the market and negotiate for additional upgrades and better contract terms wherever possible. Hire your own third-party home inspector and do not take possession until you are fully satisfied that every detail is addressed. Remember to shop around for competitive rates on lenders and other necessary closing services. Don’t simply go with whomever the builder suggests, but do consider them. Check that the builder has to consult with you before making any changes or alterations to the finishes or design. Make sure the builder’s warranty is adequate and matches that offered by their competitors. Be wary of non-refundable deposits.

If you’re looking to buy a new home in Orange County and don’t have an agent, we would love to represent you! We have an attorney on our team who will dissect the builder’s contract point by point and we know the absolute best lenders and service providers. Click here to reach out to us. If you are not in Orange County and don’t have an agent, don’t worry. We have approved affiliates across the nation whom we can refer you to. Wherever you are, we would love to answer whatever questions you might have. Drop us a note anytime regarding this article or for help otherwise.

Whatever your choice, happy house hunting!

ABC’s of Buying Vs Renting a Home in Orange County: Part Two

(Please See Part One Here)

Renting

Pros of Renting:

Additional opportunities: A rental deposit is significantly less than a down payment on a home so allows for spending or investing elsewhere.

Bigger or better: It is possible to rent a larger home or one in a better neighborhood than you can currently afford to buy. This could mean living for a year or two in a house on the bay with a boat dock or oceanfront when you might not qualify anytime soon for such a purchase loan.

Convenience: The fewer things you own, the less there is to take care of. It’s significantly easier to move should you need to again.

Deciding where to buy: When new to the area, some people like to rent for a year while figuring out which neighborhood they prefer.

Expected maintenance is less: Landlords are responsible for maintenance on high cost items such as: roofing, appliances, paint, and landscaping.

 

Cons of Renting:

Alternative investments are often more volatile: Investing large sums of money elsewhere, such as in The US Stock Exchange, subjects that money to the collective emotions, whims, and idiosyncrasies of society. There can be greater risk and volatility involved with alternative investments.

Beat by inflation: Rents keep going up. Orange County renters are burdened by the rising costs of rent every year at rates currently increasing three times faster than national inflation!

Customization is difficult: Renters need to ask their landlord permission to make alterations to the home’s esthetics. If they change something such as the paint color, they are usually expected to change it back before vacating or risk losing their security deposit.

Down the drain: Rental payments create equity for the landlord, but nothing for the tenant. At a rate of $3000 a month, in five years $180,000 is down the toilet.

Equity gains go unrealized: More people have become wealthy owning real estate in Orange County than by any other means. Real estate consistently increases in value over time due to an expanding population, high desirability, limited supply, increasing wages, and inflation.

Fast increasing rents in Orange County: The 2018 statewide initiative to allow rent controls anywhere in California failed by a wide margin last year. Landlords remain free to increase rents in Orange County by as much as the free market supports. According to The Bereau of Labor Statistics rental prices are increasing faster in Orange County than anywhere in the United States. This is the main reason motivating buyers to escape the rental trap.

Gotta go: Landlords can decide their renters have to vacate for many reasons, such as selling the property or because a renter didn’t follow the terms of the lease. Unless you secure a multi-year lease, this could happen with very little warning.

 

The Bottom Line:

For the short term, it makes the most sense to rent. The online real estate brokerage firm, Zillow, currently calculates the Breakeven Horizon at 4.1 years of home ownership before buying a home in Orange County makes more financial sense than renting one. Renters enjoy the ease of moving around more often, don’t have a large amount of money tied up in one place, and have fewer maintenance concerns.

In the long term, buying a home is usually better. In addition to creating wealth with an inflation-proof investment, buyers enjoy fixed payments, security, pride of ownership, and have something they can leave to their heirs.

Need more help deciding?

Here are two online calculators where you can input your own numbers. As the New York Times Calculatoris from 2014, keep in mind it does not factor in recent changes to the US tax code since that time. For the Realtor.com Calculator: click on “Advanced Options” and you can enter your own numbers. You can also contact me for a free consult and for help figuring out your numbers.

ABC’s of Buying Vs Renting a Home in Orange County: Part One

As predicted, the Orange County real estate market is already getting hot again! Buyers are eager to take advantage of the massive drop in interest rates and slight dips in property values as compared to the stormy winter. This market shift comes at a time when the Consumer Price Index shows rental rates in Los Angeles and Orange County have increased at their fastest pace in eleven years, growing at an average annual rate of 5.5% year-over-year (February 2018 through February 2019) and outpacing all 24 metro areas nationwide tracked by the Bureau of Labor Statistics.

With interest rates dropping significantly and rental rates increasing at over triple the amount of national inflation, now is the perfect time to reassess the benefits of buying versus renting a home in Orange County. Part One this week breaks down the pros and cons of buying. Next week, in Part Two, you will find the pros and cons of renting and how to ultimately decide which is best. Part Two will also feature two online calculators that allow entering specific numbers and assumptions for those interested in taking a closer look. Beyond the basic financials, each part also addresses lifestyle concerns.

 

Buying

Pros of Buying

Appreciation over the long-term: While nobody knows exactly how much home prices will change over time, values over the long run in Orange County have historically outperformed the vast majority of markets nationwide. This trend is expected to continue due to high desirability, increasing wages, and limited supply.

Benefits of leverage: When a property goes up in value, you make money on both your down payment and money borrowed from the bank. For example, if you put 20% down on a million dollar house ($200,000) and borrow 80% ($800,000) and the property goes up in value 10%, then leverage has created a 50% ($100,000) return on your initial $200,000 investment! Where else will you find that kind of return?

Conservative investment: Home ownership is typically a stable investment that secures a place to live.

Disappearing mortgage payments: Eventually, you will own your home free and clear with no mortgage payment every month.

Equity for your heirs: Wealth created by home ownership can be passed on to future generations. California’s Proposition 13 also allows passing on your limited tax base price (at a maximum 2% tax increase per year) to your heirs.

Fixed monthly payments at currently low interest rates and forced savings: At first, your combined mortgage, property taxes, and insurance may seem like a steep amount to shell out each month. With a fixed rate mortgage, though, this amount seems relatively less and less every year. A portion of these payments is paying off your principle, effectively forcing you to save this money every month.

Getting involved: Homeowners tend to grow more involved with their communities. Renters can face a certain stigmatism from the assumption they are only there short term.

Home is where your life happens: Owning a home, you will experience the pride of ownership, be more likely to live there longer and create more memories.

Inflation proof investment: Generally, as the cost of living increases, so does the value of your home. Owning a home, your rent does not increase every year. In Orange County, the Consumer Price Index shows rising rents are currently the greatest driver of overall inflation. Owning a home is your greatest protection against this phenomenon.

 

Cons of Buying

All of the maintenance costs: Home ownership means gardening or hiring a gardener, termite treatments and occasional repairs, pool cleaning, electrical, plumbing, appliances, roofing, and so on. Some people would rather have a landlord deal with these things for them. But some enjoy the pride of ownership and working on their home. And is it really that much work?

Buying expenses: Title and escrow fees, home inspection fees, potential HOA fees, pro-rated property taxes, and other expenses involved with buying a home are not applicable when renting.

Cost of lost opportunities: Purchasing a home is a huge investment. This means you will not have that money to make other purchases or investments. Some believe they might make higher returns on their money in the stock market or elsewhere. Others want to move around more.

Difficulty moving: Although some people keep their homes as rentals or second homes when they eventually sell and move, most folks have to sell their home in order to afford a new one. Selling a home is a multi-faceted process involving a fair amount of time, effort, and a thick stack of paperwork. A good real estate agent, though, can make this process seamless.

(Please See Part Two Here)

 

Orange County Real Estate Crash?

The Federal Reserve’s decision to raise interest rates excessively throughout the second half of 2018 brought real estate values in Orange County and across the nation to a screeching halt. While raising interest rates is meant to stave off inflation (although there was little evidence of that) and prevent a recession, these moves triggered both the public fear of a looming recession and concerns that real estate markets may have reached the apex of the current cycle.

According to data compiled by Redfin, a web-based real estate brokerage firm, median nationwide prices peaked in June 2018 at $310,000. Since the peak, the latest February 2019 data shows prices fell 7.4% to $287,000. These numbers represent the median moving average price over a three-month period ending in the indicated month for all residential home sales: houses, condos, townhomes, co-ops, and multi-family (2-4) units. Viewed from a year-over-year perspective since February of last year, the national market remained up 0.6%, although most of the gains of 2018 have vanished.

Applying the same analytics, the Orange County median price peaked at $728,000 in June 2018 and then fell 6.7% to $679,000 by February 2019. Looked at in terms of year-over-year data ending in February 2019, Orange County median home prices are down 2.3% since February 2018. The accompanying graph labeled “Orange County Median Home Values” illustrates this movement.

Orange County Median Home Values

Andrew LePage of the Irvine-based analytical firm CoreLogic explains, “Buyer enthusiasm during this period was dampened by a variety of forces including affordability restraints, stock market volatility, concerns home prices might have peaked and uncertainty [concerning] a partial federal government shutdown.” These factors and a trade war with China all contributed to uncertainty.

So, does this mean the Orange County Housing market is going to crash? Unlikely.

Allow me to explain. The previous housing crash of 2006 to 2009 and subsequent Great Recession was fueled by reckless lending policies and practices. Some of you may have heard the story of the professional stripper with no credit able to obtain loans for eight houses, interest only, with no money down. Nothing at all against strippers, but lending standards have since changed. We are no longer looking at a massive supply of foreclosures from people unable to make monthly payments.

Unlike the crash that led to the Great Recession, the latest substantial gains in real estate values have been based on sound economic principles such as a booming economy, low unemployment, higher wages, location desirability, and true affordability.

The Federal Reserve raises interest rates during good times to fend off inflation and so that they can lower rates again and stimulate the economy when things start to stink. They simply raised the rates too quickly this time. Realizing this mistake and not wanting to cause the very recession they are tasked to safeguard against, the Federal Reserve has since lowered rates several points. Fixed rate mortgages are now roughly half a percent lower than levels of late 2018.

This is a substantial rate reduction, and it appears the Federal Reserve may have corrected its mistake of raising interest rates too fast. For evidence of this, on a statewide level, Redfin data shows California property values down 8.3% since peaking in May of 2018, but then shows a reversal of this trend since interest rates dropped again. Statewide property values have made a turnaround since January 2019 and are heading back up. While the California market as a whole experiences more pronounced seasonal price declines towards the end of each year compared to the Orange County market, the upward trend shown here in “California Median Home Values” is indicative of the larger market returning to normal. CoreLogic’s LePage continues, “January’s slowdown was likely tempered by a significant drop in mortgage rates that began in December, improving affordability at a time when inventory was up year over year.”

California Median Home Values

The cooling in housing prices, which some buyers eyed as a possible market crash, appears more likely the result of a regular seasonal reduction in prices compounded with rising interest rates.

Agreeing with this sentiment, CoreLogic’s chief economist, Frank Nothaft explains, “The spike in mortgage interest rates last fall chilled buyer activity and led to a slowdown in home sales and price growth… Fixed-rate mortgage rates have dropped 0.6% since November 2018 and today are lower than they were a year ago. With interest rates at this level, we expect a solid home buying season this spring.” Such optimism for 2019 is also shared by the group’s president and CEO, Frank Martell, who comments, “As we head into 2019, we can expect continued strong employment growth and rising incomes which could support a reacceleration in home-price appreciation later this year.”

While none of us have a fully functioning crystal ball, interest rates are expected to remain tempered for the rest of the year. Considering the complete picture, it will be interesting to see how the Orange County housing market plays out in 2019. Variance is expected in various Orange County cities. Higher end markets, for instance, could experience greater effects from the recent State Property Tax Deduction Limits, the impacts of which remain to be seen. Data available for individual cities currently represent too small of a sample for any meaningful determinations.

Stay tuned for more Orange County market updates and analysis as additional facts and figures become available.

State Challenges to Property Tax Deduction Limits

California Senators passed a bill last Tuesday to counter a provision of the 2018 federal tax overhaul, which imposed a $10,000 limit on combined state and property tax deductions from federal taxes. Tuesday’s bill aims to allow taxpayers to contribute to state sponsored charitable programs and then deduct 85% of the donated amount from their California state taxes. Additional legislation and potential lawsuits are in the works as California already has the highest marginal tax rate in the nation at 13.3% and lawmakers are fearing an exodus of wealth and capitol to neighboring states with lower taxes.

Why Take Action?

Approximately a third of taxpayers in California applied the state tax deduction in 2015, taking an average of $18,438 off their federal taxes. This means $8,438 of that is now gone. Poof!

Property owners in more desirable areas, such as Coastal Orange County, can no longer deduct the amounts they planned for since purchasing those homes in years past. This has significantly eroded affordability. Coupled with rising interest rates stemming from a strong overall economy, higher end property turnover rates came to a screeching halt over the past year. Well-priced homes are no longer receiving multiple offers over asking, as was the case in years past.

How Other States Are Reacting

New York, New Jersey, Connecticut, Idaho, and Nebraska are all processing similar legislation as just passed in California. Lawsuits are in the works as well. Having experienced a mass-exodus of wealth due to higher taxes, New York is working on a solution of earmarking state income tax as a payroll tax. This is in addition to allowing charitable donations to state sponsored programs in place of property taxes. New Jersey Governor Philip Murphy pointed out the federal government has not been consistent on its policy regarding charitable donations. Alabama, for example, already allows a state tax credit for private school voucher donations. Why shouldn’t other states be allowed to do this as well?

Federal Government Response?

Federal lawmakers are quick to point out that the only states fighting portions of the tax overhaul are the same ones massively overspending and overtaxing their people. “I hope that the states are more focused on cutting their budgets and giving tax cuts to their people in their states than they are in tying to evade the law,” United States Treasury Secretary Steven Mnuchin said. The IRS sent a notice to states that read, “Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.” Boom! That doesn’t sound good for California’s bill addressing this concern.

How Other Attorneys are Responding

Former IRS attorney, Daniel Rosen, who is currently with the law firm Baker McKenzie responds, “This notice was issued with the intention of dissuading taxpayers from making donations to state charitable contributions. I would anticipate challenges to this notice fairly quickly.”

Our Response

Tax attorney specialist and real estate team member, Chris Kohl, simply says, “It won’t work.” Kohl explains “the IRS holds the position that if you give a “charity” $100 and your state government gives you back $85, you really only made a $15 charitable gift.”

If you or somebody you care about is considering selling or downsizing in Orange County to save money on your taxes or for another reason, please feel free to call or email us with whatever real estate questions you might have. My team of talented professionals and I have the most accurate and up to date information. We offer free answers to your real estate questions and look forward to hearing from you!

Mike Kohl

(714) 475-4857

MikekohL3@gmail.com

License# 01907171

California Requires Solar Panels

Always the innovator, the State of California will soon require solar panels on nearly all new single-family residences and multi-family residences that are three stories or less. The California Energy Commission passed this groundbreaking law unanimously to take effect in 2020. While this is expected to add approximately $10,000 to the cost of a new home in the middle of a statewide housing crisis, the costs can be built into a standard thirty-year fixed mortgage rate and will likely save buyers double the expense. For example, the requirement is expected to add roughly $40 to the average monthly mortgage rate, but is expected to save buyers around $80 a month on electric bills.

The new law also provides incentives for purchasing Tesla-type battery storage systems and going partially or completely off grid. Other caveats are that homes built in regularly shaded areas are exempt and that there is an option for multiple homes to share a larger grouped solar power array rather than having individual ones. In addition, buyers will have the option to lease the systems rather than purchasing them, but this is known amongst real estate professionals to complicate the resale process as the mortgage and the solar power lease would then each require approval for the sale to happen.

How will these effect businesses, homeowners, and the environment?

California solar companies are expected to see a 44% increase in profits because of the measure. Builders have no choice, but many are embracing the green movement as a selling point that adds value to new homes while simultaneously saving their customers money overall. The move will greatly contribute to the state’s law requiring a minimum of 50% of all electrical power comes from non-carbon emitting sources by the year 2030 and to the state’s tenacious goal of reaching carbon neutrality within the next thirty years. If that ultimate goal is accomplished, this means the world’s eighth largest economy will no longer contribute to global climate change. This is good for polar bears.

Large utility companies, such as Southern California Edison, point out this new law only requires solar power systems of 2 kilowatts to 3 kilowatts, which is far short of powering an entire house. Unless the home has a larger solar panel system than required by the law and is also equipped with a Tesla-type battery for storing the solar power generated, owners of new homes will remain reliant on the electrical grid. As the electrical grid is massively expensive to operate and maintain, utility fee structure is changing to compensate. Homeowners with or without solar panels who remain somewhat or fully reliable on utility companies for electricity may find their rates rising significantly to keep the grid operational.

Know your options!

One of the greatest benefits of purchasing a new home is the ability to customize it. Amongst the many options, buyers should know that installation of larger solar power systems and Tesla-type power storage batteries are often some of the options or negotiable terms. Know the pros and cons of purchasing verses leasing a solar power system, especially as this decision will significantly both the resale process and property value.

Whether you are looking to purchase a new or existing home, please feel free to email me regarding solar power options and whatever other questions (such as tax considerations) you might need answered at mikekohL3@gmail.com. I always have time to share my knowledge in this field and discuss how it may impact your financial situation.