Home Values Rising Across U.S.

Home values in 20 U.S. cities rose at a faster pace in the year ended October 2015, as lean inventories of available properties combined with steadily improving demand.

The S&P/Case-Shiller index of property values climbed 5.5 percent from October 2014 after rising 5.4 percent in the year ended September, the group said Tuesday in New York. Nationally, prices rose 5.2 percent year-over-year.

A limited supply of properties for sale has helped prop up home values, boosting the household wealth levels of U.S. homeowners in the process. Faster wage growth and continued low borrowing costs will be needed to keep low-income and first-time buyers in the market and provide the next leg of growth in the housing recovery.

Job gains and more household formation “will continue to boost demand, and prices should continue to stay within this current healthy range in 2016,” Anika Khan, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said before the report. And even after the Federal Reserve’s first interest-rate increase in almost a decade, “it’s still going to be an environment where overall mortgage rates will remain low.”

Home Prices Rise

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Effect of Interest Rate Increase on Commercial Real Estate

The Federal Reserve Board’s 25-basis-point increase today will not have a significant impact on commercial real estate (“CRE”). Today’s increase could signal a slight weakening of investor demand for CRE, as lower risk investments like treasury bonds begin to look more attractive. However, other reasons suggest CRE prices and returns will continue to be attractive, even in a rising interest rate environment, including: (1) inflation, as a major driver of longer-term yields, is expected to remain below 2% over the next 10 years; (2) improving economic conditions, evidenced by steadily increasing jobs, leads to increased leasing and rents; (3) the U.S. continues to shine as an investment safe-haven (compared to most other countries), attracting massive amounts of capital from around the world; and (4) the Fed seems intent on a slow and gradual approach to tightening the money supply in the foreseeable future.


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U.S. & San Diego Housing Forecast for 2016

Rising prices…

Miller Presentation to Housing Outlook_Page_02Miller Presentation to Housing Outlook_Page_07

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North Park TriPlex

Howard Avenue
3 Residential Units in North Park, San Diego for $535,000!

Great rehab and flip opportunity.

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2016 Retail Forecast

Wealth for middle-income households has remained stagnant while upper-income household wealth has doubled in real dollar terms over the past three decades, according to Pew Research data. Factoring this data, high-end retail will likely prosper as the high-end population prospers, and commodity/mass-market retail will likely languish. Retail is still a top performer though, having the highest total returns of all property types in two of the last three years, and also having led the long-term performance measures of the ten-and 20-year time periods. Yet, lackluster retail sales growth, limited new store openings, continued store closures, and an overhang of crippled retail centers burden the shopping center sector. While investment prices for retail assets have risen 62% since the bottom of the Great Recession, they remain 7.5 percent below their prior peak (except for a few major markets which have done better).

Generally speaking, cap rates have compressed and transaction volume for retail has risen annually throughout this decade, with volume hitting $91.3 billion for the 12 months ending June 2015. Capital trends also give every indication that retail property investment activity will again be brisk in 2016.

Expect Main Street retail to outperform other submarkets due to the migration of people into urban environments. Also, as the demographic mix in the United States changes, so does its retail mix. Hispanic-themed centers are springing up, as 1/6 of the U.S. population identifies as Latino. Most major cities already have Asian ethnic enclaves with significant urban retail components. Other immigrant groups can be expected to claim their share of store area too.

The bricks vs. clicks debate continues to play out. All retailers are converging toward multichannel customer access. Physical stores have adopted e-commerce to compliment store operations, and internet retailers (even Amazon) are opening physical stores as a supplement to online sales. The commodity retailers of music, books, travel, and such will not likely return; but most major online retailers have yet to turn a cash profit (even in an era of minimal sales tax), despite their rising stock prices. At some point, they will have to earn a profit from operations to remain viable; and further increasing their market share from the current 9% will be slow dredging. The application of technology presents a bigger operational trend than merely e-commerce. Technology now enables almost any mall, store or retailer to see your personal preferences, and proximity, allowing it to transmit a custom-tailored message or coupon.

Tenant mix continues to evolve, as services not replaceable by the internet move to the fore – primarily food and entertainment, but also lifestyle. Millennials and boomers spend much of their disposable income on restaurants and food. Personal services like massage, dental, yoga and fitness, as well as entertainment, also remain necessary in a digital age.


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San Diego County’s Housing Forecast — BUY Sooner than Later

San Diego County’s net growth in population from birth (approximately 24,000 in 2014) and in-migration (approximately 12,000 in 2014) will out-pace the supply of new multi-family and single-family homes over the next few years. According to the SANDAG Series 13 forecast, 3,574 single-family and 7,138 multi-family units need to be added each year, between 2012 and 2020, to meet the demand caused by this population growth. However, housing permit data reveals single-family permits average only 2,272 per year, and multi-family permits average only 3,153 units per year, despite the economic recovery. This new supply accounts for only 64% and 44% of the annual need, respectively, indicating the County’s already substantial housing shortage is worsening. As demand continues to increase and supply continues to tighten, increased prices and affordability problems are the inevitable result. Rising interest rates will only exacerbate the affordability problem — so the best time to buy a home anywhere in San Diego County is probably sooner than later.


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2016 Investment Prospects Improve for All Major Commercial Property Types

Scale:               1 Abysmal   2.Poor    3.Fair    4. Good    5. Excellent

                                                 2015                     2016*

Retail                                       3.01                      3.19

Hotels                                      3.37                      3.42

Office                                       3.17                      3.43

Multifamily                              3.48                      3.50

Industrial/Distribution              3.61                      3.63

* Source: Emerging Trends in Real Estate Survey

Improvement Image

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In Japan, the word for constant and never-ending improvement is kaizen. Not only is kaizen an operating philosophy for modern Japanese businesses, it’s also the age-old philosophy of the warrior class—and it has become the personal mantra of millions of successful people all over the world. Virtually all world-class achievers, in business, sports, and arts, are committed to continual improvement. They understand that in order to succeed in an ever-changing world, they must constantly learn and evolve. They don’t wait until external influences, such as a teacher, manager, or industry development force them to gain new skills or knowledge. Rather, they are self-motivated learners constantly looking for new ways to improve their performance and deepen their understanding of the world around them.

Kaizen-2.svg“Live as if you were to die tomorrow. Learn as if you were to live forever.” – Mahatma Ghandi

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2016 Upward Housing Trend

According to the Emerging Trends in Real Estate 2016 survey, US residential construction starts totaled 1.2 million for June and July 2015 — the most activity in the last 8 years. Single-family housing, rather than more apartment development, spurred this growth. Historical normalcy appears to have returned, as the inventory of finished new homes for sale now approximates 5 ½ months, and price increases have begun to reflect a shortage of supply. Housing Up
While interest rates will slowly trend upward, the Fed will take great care not to stall the recovery. These conditions set the stage for further gains in 2016, given the existing scarcity of ready-to-build housing lots. The multiplier effect will result in the addition of other jobs, as well as increased economic activity in the retail sector.

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3 Real Estate Tax Shelters Used by Wealthy Investors

1. Tax-Deferred Exchanges

Real estate investors can offset real estate capital gains or losses with a tax-deferred exchange. Section 1031 of the Internal Revenue Code allows real estate investors to sell property, take a profit, and defer capital gains or losses, as long as the proceeds are reinvested in real estate. Most real estate investors use 1031s to build long-term tax-deferred (or even tax-free) wealth. There is no limit on the number of 1031 exchanges you can do. For example, Susan buys Building 1 for $200,000, and re-sells it for $400,000, with a profit of $200,000. At the time of the sale, she will owe taxes on this profit; unless she does a 1031 exchange, in which case she can take the entire $400,000, and invest it in a more expensive Building 2, without paying any tax. She can then repeat this process for the purchase of Buildings 3, 4, 5, and so forth, generating a multi-million dollar fortune in non-taxed wealth. Essentially, the taxes can be avoided forever, because when Susan dies her heirs will get an automatic step-up in basis as of the date of her death, under Internal Revenue Code § 1014, for purposes of calculating their gain upon sale.

2. Investments in Rural Land

All except 1 of the 50 states have a “use-value assessment,” which allows land-buyers to purchase land and sell it at its assessed “use-value” rather than the “fair market value,” as with other types of real estate. This tax credit was originally intended to help farmers retain their land, but wealthy investors now use it as a tax shelter. In 2011, billionaire Michael Dell reportedly qualified his $71.4 million 1,757-acre ranch in Austin, Texas for this tax shelter (because family and friends occasionally use it to hunt deer) — reducing its assessed value to $290,000 (and saving him well over $1 million per year). Steve Forbes reportedly reduced the assessment of his multi-million dollar estate in New Jersey by approximately 90%, by putting a few cows on it. Former Presidents George W. Bush and Ronald Reagan have taken full advantage of these credits as well. Of course, this loss of property tax revenues can severely impacts schools, public services, and less wealthy taxpayers.

3. Dynasty Trusts

Dynasty Trusts are a form of irrevocable trust used by wealthy families to create generational wealth, by allowing descendants to remain exempt from estate, gift, and generation-skipping transfer tax for the life of the trust. The trust can be funded while you’re alive, or upon your death. In either case, your assets, like real estate, are placed within the trust. The biggest advantage of a dynasty trust is that it can save your descendants a significant amount of money in estate taxes. The assets you put in the trust (plus any increase in their value over the years) are subject to the federal gift/estate tax just once, when you transfer them to the trust. They are not taxed again, even though multiple generations benefit from them. By contrast, if you simply left a very large amount of money to your children (without a trust), it would be subject to the estate tax. And whatever they left to their children would be taxed again. For example, if you and your spouse leave $10 million to your daughter, and that inheritance grew, over 20 years, to $30 million, it would be subject to estate tax at her death—and if federal estate tax rates and exemptions in effect then were about what they are in 2015 ($5.43 million exemption, 40% top rate), more than $9 million would go to pay the daughter’s estate tax. That $9 million tax would not be owed if the money were in a dynasty trust.

[This post is not intended to provide tax advice.]Tax Loophole

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