Upcoming Propositions With Steve White #609

On Friday, September 28, the Norris Group proudly presents its 11th annual award-winning black-tie event, I Survived Real Estate. An incredible lineup of industry experts will join Bruce Norris to discuss perplexing industry trends, head-scratching legislation, tech disruption, and opportunities emerging for real estate professionals. All proceeds from the event benefit Make A Wish and St. Jude Children’s Research Hospital. This event is not possible without the generous help of the following platinum partners: the San Diego Creative Real Estate Investors Association, InvestClub, Inland Empire Real Estate Investment Club, ThinkRealty, Wilson Investment Properties, Coach Fullerton, First Lending Solutions, PropertyRadar, the Apartment Owners Association, MVT Productions, and Realty411. Visit www.isurvivedrealestate.com for event information, and see Amazon Prime or YouTube for past events.

Bruce Norris is joined this week by Steven White. Steve is the President of the California Association of Realtors. He has been a realtor for 32 years and is co-owner of Keller Williams VIP Properties and Pathway Escrow, both is Valencia, California. He is also co-owner of Keller Williams Realty Central and Closing Solutions Escrow, both in Northridge, California. He served in numerous other leadership positions for local, state, and national associations of realtors.

Episode Highlights

  • With all the different propositions coming up, what is the process for getting legislation on the ballot?
  • What different groups will be affected by Proposition 5?
  • Who are the people opposed to Proposition 5, and what is their argument?
  • Where is the vote for Proposition 5 likely to land?
  • What does the ballot for Proposition 13 discuss in terms of a split role for commercial and residential properties?
  • What effect will Proposition 10 have should it pass?
  • Could these Propositions free up more buying opportunities for millennials and others stuck in the market?

Episode Notes

Bruce first asked what the process is for getting legislation on the ballot. Steve said in California, you can gather enough signatures to place a qualified initiative on the ballot. The number of signatures varies depending on the turnout for the previous elections. They spent quite a bit of effort and money to qualify what is now known as Proposition 5 for the November 2018 ballot. Bruce asked what it takes to pass when this goes up for vote. He wondered if it is a simple 50% majority, which he said it is.

Bruce next went on to discuss the different groups Proposition 5 affects. He began with seniors and when they move to a new location. With the way the current laws are, they would forfeit their low tax-base now and pay the normal tax rate on their new home. Steve confirmed this is true in many cases. However, there are some exceptions already in place. The voters in California passed Proposition 60 some years ago, which would allow a senior homeowner 55 and older and disabled folks 55 and older who own a home to sell their primary residence and purchase another property within the same county they live out of the 58 counties in California. However, they cannot purchase even $1 more for their new home than their previous property. Otherwise, they cannot transfer their tax basis.

They also cannot go to another county. Voters passed Proposition 90 soon after Proposition 60 that would allow senior and disabled homeowners to transfer their tax basis on the same terms as Proposition 60 to another county that would accept their tax basis. Currently, out of 58 counties in California, only ten allow that transfer. Proposition 60 and 90 just aren’t working. Therefore, they introduced the Property Tax Fairness Initiative to prevent this moving penalty for seniors and disabled homeowners. More importantly in the current news is the fact that disaster victims whose homes were severely or totally damaged from disasters would be able to do the same as the seniors and disabled.

Bruce asked about if he were in a senior parked in a home with a lot of equity. He realized if he sold his home, his tax bill would go through the roof. Bruce wondered how this would alter his decision. Steve said in many cases, folks in California who are disabled and looking to move want to downsize and be closer to children, grandchildren, and healthcare. Important moving decisions are made based on that since people are living longer. People with a tremendous amount of equity are aware that they are going to have to pay a capital gains tax, which they can pay from the real equity in their home. Where they are hesitant and sometimes outright scared is to subject themselves to a much higher property tax bill on the fixed income they are on. People are living longer and do not know how much longer they will live. The real fear with many seniors and disabled folks is that they are going to outlive their money.

This is why they decide to stay put. Often when they stay put, they are frozen in a home where they may have raised their family in a 3-5 bedroom home that is much larger than they actually need. This freezes family homes in place that tens to thousands of Californians and young families are ready, willing, and qualified to purchase. If those homes were freed up, it would go a long way towards solving the housing supply crisis here in California.

Bruce asked Steve if he finds that since this is their only decision we are losing seniors to other states where they feel more comfortable. Steve said he believes this to be true and has seen it time and time again. In many cases, their families have moved out of state. For those seniors who want to stay within the state, this moving tax penalty is very real and scary.

Bruce asked about the people who opposed Proposition 5 and what their side of the argument is. Steve said their side is that it will reduce property tax revenue in the receiving county where people purchase a new home. The Legislative Analyst Office in Sacramento is charged with giving a financial analysis on each proposed initiative. Unfortunately, the data they used to analyze Proposition 5 is flawed. The information they are not taking into account is that all the economic activity that happens around a home purchase. People remodel, put in new paint, a roof, remodel, relandscape. This is all the economic activity they know happens in the real world around home purchases and sales. They are not doing what they call a real world dynamic analysis. They are only doing a static analysis and looking at what a loss would be on the tax revenue on the home that is purchased.

Another myth out there surrounding Proposition 5 is the opposition because they have a weak position. They keep focusing on the fact that they believe that this would allow wealthy people to purchase a more expensive home. The overwhelming majority of seniors that own homes in California are not wealthy people. They are middle class people who own homes. These are mom and pop who need to move closer to children, grandchildren, and healthcare. This would allow seniors, disabled, folks, and disaster victims to purchase a home of any price anywhere in the state of California. They can then bring their Proposition 13 tax assessment with them.

To the extent they purchased a more expensive home, if somebody sold a home for $600,000, the median price in California, and purchase one for $900,000, they can transfer their tax basis to the first $600,000 of that purchase, but they have to pay the market rate of the remaining $300,000 since this is fair.

What is interesting about the receiving argument is the county will be on the opposite end of that many times. It is unfortunate that the Legislative Analyst’s Office only does these analyses one way. The voters in California simply do not get the true real world picture of any initiative based on a static analysis. Bruce gave an example of a friend of his whose mom passed away recently. She had lived on a home on the beach for 40 years. She bought it for $75 grand, and her tax bill gradually went up to $3,300. When she passed away, Glen sold the home. The new buyer will have a $20,000 tax bill. If she had made that exchange, bought a less expensive home, and stayed in the same county, she would have a less expensive tax bill but the $20 grand would have been realized on the new purchase. It seems there is a chance for more of a bump-up and the argument does not really hold water.

Another factor is the senior can now say they can move and not be afraid of the tax bill. You may have a builder say there will be more demand and be able to build something they could not before since they knew the senior could not make the transfer due to the tax. Now they can. By the Legislative Analyst’s analysis alone, there have been 1,000s of new transactions that would happen annually because of the passage of Proposition 5. Currently, we are at an annualized basis of 409,000 sales in the state of California. CAR’s data shows something similar that tens of thousands of transactions would be 43,000. That is an 11% increase in the numbers of transactions in a state where the numbers of sales where 40 million people reside is the same number that 45 years ago when the population was half of what it is today.

We are really in a housing crisis here in California. Our unaffordability is driven in large part by the unavailability of properties for sale. This could be a badly needed inventory for young families ready, willing, and qualified to purchase and pay those higher taxes.

The Norris Group just interviewed the president of the California Builders Association. He asked him what the basic difference is between building in California and another state. He said in Texas, he has to ask what the economy will be like next year. In California, he has to ask what it will be like in 15 years. He was serious about it too. We do have an affordability crisis and supply problem. We are not encouraging builders to build products. There are a lot of pieces of the puzzle you have to solve. One of the frustrating things you are looking at is there is no willingness from people to reach across the aisle and say we need to create a practical solution.

The supply of homes available for sale in California is extremely low, even as the market cools a little bit now. He was in the Central Valley recently where you are looking at counties like Fresno, Madera, Kern, and Kings County. In that area, they only have roughly three months of supply of homes on the market. If no other homes came on the market, starting today it would take a little over three months to sell everything available now. A normal market that is not a seller’s market but a normal market is 6-7 months. The Central Valley is an area where there traditionally is more inventory than other areas in the state where we still have 1 month’s supply of homes on the market. This is driving prices up exponentially and adding to the unaffordability.

Bruce said with the other parts of the bill regarding being disabled, if you had an event in your life where it was either a progress of what you already had or became disabled in an accident, you can make that same transfer from your current residency where you can no longer stay. Now you can sell it and still have your tax base where you can survive. He does not see any reason someone would vote against that. The disabled people do not have to be 55 or older because accidents happen at any age. In particular, that demographic does often need to move closer to healthcare.

There are also the disaster victims to think about. Last year alone, 10,000 homes in California were destroyed by fire. Entire communities to destroyed, so people had to move to a different community or county. CAR did not even know the tally of the number of homes destroyed in fires this year because in many areas they are still burning. To slap those folks with a moving tax penalty is simply not fair. Bruce asked if there is a sense where the vote is likely to land. Steve said the polling is very favorable for the initiative when they were formulating it once they added disabled and disaster victims and limited it to seniors. At this point, the polling jumped way up. These are folks who are often on fixed incomes and middle-income people. There are tens of thousands all over the state of California. The polling is very favorable.

At the time, they had some labor groups who came out and said they were against it. However, they hear from the rank and file that leaders in the union are opposed to Proposition 5. However, they are still voting yes because it is good for them or their parent. They are hearing this all over the state of California. To date, there is not an organized opposition campaign in California.

Bruce next talked about Proposition 13 and the talk of doing a split role for commercial properties and residential. Bruce asked if there is anything on the ballot for this, which Steve said it is coming. He was glad he mentioned this because CAR has already submitted for title and summary another initiative for the November 2020 ballot that would deal with the shenanigans of the transfers of commercial properties where those properties are held by corporations. They sell stock in the corporations, and this is how they transfer the property. They do it in very crafty ways, or shenanigans, that allow them to transfer their properties to a new owner. If it was a primary residence, it would trigger a reassessment and they would have to pay higher taxes. With these shenanigans, they can get around the intent of Proposition 13 to the detriment of homeowners in California.

The initiative for the 2020 ballot would clear up those shenanigans and keep commercial properties owned by someone who owned a couple rentals, sold them, and transferred them into an apartment building. This is their retirement. A split role would automatically raise the taxes on that and make it unaffordable for small investors. It would be disastrous. The proposition would take care of the shenanigans. When a property is transferred by stock or deed, it would trigger the reassessment of that property.

Bruce and Steve ended by discussing Proposition 10. Bruce asked if it would take a 50% vote to pass, which Steve said it does. He asked him what his feeling was on what the effect will be if the legislation passes. Steve said the immediate effect is already being felt. Just the spectra of this proposition passing has a number of builders and large developers who would have been in the 15-year palling stage that builders mentioned, although not so tongue-in-cheek. They are putting them on hold because this would disincentivize anybody from building badly needed rental units in the state of California because they would be so heavily regulated and would no longer economically pencil out.

In addition, if Proposition 10 were to pass, it would also allow cities and counties to enact a very onerous rent control ordinances that would effect single-family homes. They would tell you what you could rent. Steve said for many years he sold a number of his homes to mom and pop who had saved a little money. For their retirement, they purchased a property down the street or across the city where a small investment was located. This would make it unaffordable for them and would severely limit people’s ability to use that income when it is badly needed when they retire. We are already seeing effects of what could be if Proposition 10 were to pass. It would diminish the amount of available rentals almost immediately. When Bruce speaks in front of investors all the time, one of the hot topics is whether or not they should sell.

The Norris Group would like to thank its Gold Sponsors for supporting I Survived Real Estate: Guaranteed Rate and Nathan Chabolla, In A Day Development, Inland Valley Association of Realtors, Jason Thorman with Coldwell Banker, Jennifer Buys Houses, Keystone CPA, LA South REIA, Las Brisas Escrow, Michael Ryan & Associates, New Western, NorcalREIA, NSDREI, Orange County Real Estate Investors, the Outspoken Investor, Pacific Premier Bank, Pasadena FIBI, Pilot Limousine, RealWealth Network, Rick and LeeAnne Rossiter, SJREI, Spinnaker Loans, South OC REIA, Tri-Counties Association of Realtors, uDirect IRA Services, White House Catering. See www.isurvivedrealestate.com for event information.

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