Real Estate Digest
A California Real Estate Newsletter
Edition 12, August, 2016



Historically-high housing prices in Santa Cruz and the Bay Area are on the minds of many. It naturally follows to ask, are we in a housing bubble? A bubble occurs when prices are decoupled from the true value of an asset, and due to the expectation that prices will continue to rise, they do so until the bubble bursts. Therefore, the question is, are people buying real estate in the Bay Area simply because they believe that the prices will continue to rise, or is there another explanation for these higher than normal prices?

Possible justifications for higher prices include a high demand and low supply of housing, higher incomes, and an overall more productive local economy. As this article explains, there has been mildly faster job growth in the Bay Area, particularly in San Francisco, in comparison with the rest of the nation. The industries growing the fastest are professional services and information jobs, which encompass many of the jobs we refer to as "tech." This implies that the economy, and not just the housing market, is improving in the Bay Area. However, a few key points make one less confident:

  • Close to 80% of our local tech sector is not profitable and reliant on venture capital. In short, if the investment slows these companies' growth will follow.
  • Affordability has become a major issue for workers and businesses alike. This being the "most expensive place in the country to live and work in" companies face infrastructure constraints - lack of office space, scarcity of affordable housing, and transportation congestion.
  • American consumers are driving the economic expansion locally and nationally. If confidence falls and people stop spending, the economy will slow down.
  • Easy money for high net worth individuals may be driving up prices, as described here. If this practice does not slow with the economy (especially the tech sector), this would imply we are in bubble territory, especially given that some of these individuals hold wealth in their company's stock.

So, while improved economic activity has influenced the increase in housing prices, this economic development may lack stability in the long run. The Bay Area has shown signs of cooling, and real estate prices appear to be following suit, especially in the luxury market. Most economists would see this slow down as healthy, and point out that it may indicate a shift from irrational exuberance to healthy optimism, our greatest ally against a housing bubble.

Other Sources:


A recent study by Zillow uncovers some interesting information on foreclosed home values post-crisis and the growing inequality in our country. Some key points include:
  • The rich-poor divide is growing in the U.S. In 2000, high-income households made an average of six times as much income as the lowest third of households. In 2015, the top third made nearly seven times as much as the lowest third.
  • Foreclosed homes gained value faster than other homes, and in many markets, are more valuable now than they've ever been. Since the lowest point in the housing bust, the average U.S. home has risen 22% in value, while the average foreclosed home has risen 39% in value. In many cases, investors bought foreclosed homes and converted them into rental properties, benefiting from the recovery as home values bounced back. 
  • The percentage of single-family homes being rented out has risen from 13% to 19% over the past decade and homeownership as been on the decline since the housing crisis of 2008
This speaks to two trends in our country: the issue of income inequality, and a decline in homeownership. Interested? Read more here.



  • Clinton's "Breaking Every Barrier Agenda" outlined here proposes to lift more families into sustainable homeownership and connect housing to opportunity through a $25 billion housing investment program.
  • Tax Policy Revisions:
    • Return the estate and gift tax rate to 2009 levels, which will reduce the individual exclusion from $5.45 million to $3.5 million, and the exclusion for couples from $10.9 million to $7 million, while raising the top tax rate from 40% to 45%
    • Create a new capital gains schedule. The current schedule taxes the gain at the regular income tax rate (maximum of 43.4% including the additional tax introduced by the Affordable Care Act) if it is realized within less than one year of acquiring the asset. It taxes at a maximum of 23.8% if it is realized anytime after a year. Clinton's plan will reduce the capital gains tax based on the number of years the household holds the asset. To read more about the actual tax rates click here

  • Trump's tax plan will reduce federal revenue by $9.5 trillion in the next decade. Without a decrease in federal spending, this plan will increase the national debt by $1.6 trillion over ten years, including interest, according to the Tax Policy Center.
  • Most of Trump's tax cuts affect wealthy households. The top 0.1% of taxpayers - those with incomes higher than $3.7 million - will receive an average reduction of 19%, equal to $1.3 million per household. The average household tax reduction, which includes lower-income taxpayers, is 7%, equal to $5,100.
  • Of specific interest to holders of real estate, Trump's plan will:
    • Add a ceiling on capital gains tax at 20%. This will make it easier for short-term investors to profit, which encourages real estate investment and tends to push prices higher, though perhaps to the detriment of low and middle-income homebuyers unable to compete in today's already hot market.
    • Repeal federal estate and gift taxes.
    • Repeal the 3.8% healthcare tax on net investment income for taxpayers with incomes over $200,000 for single filers and $250,000 for joint filers.


High demand and low supply in the bottom end of the market is resulting in fierce competition and higher prices.
  • There continues to be constrained supply on the bottom end of the market which is driving up prices for lower-priced properties all across the state. The price of houses in the bottom 20% of their respective markets is growing faster than all other price-buckets in all markets, 6.2% compared to 3.2% of the top 20% of homes. 
    • We're starting to see fierce competition drive the show on the bottom end of the market. 
    • There is high demand in the low end, due to an improving economy. 
    • There is a lack of inventory, which pushes up prices and erodes affordability. 
  • A possible solution? Build more affordable housing. 
  • Consequences: it is a very good time for people with property in the lower end of the market to sell. 


Many first time homebuyers take out loans to finance part or all of their real estate purchase and lenders want to maintain a specific loan-to-value ratio. In other words, the loan amount offered to the buyer is dependent on the value of the property. In real estate there are multiple definitions of value, and in the end, it comes down to perception. It is important to have an accurate idea of your home's value. If the appraiser comes up with a lower value, you may be digging deeper into your pockets for a larger down payment than you expected, or, you may have to restructure the loan.

This is why we believe that, while technology, such as automated home valuation algorithms and search engines such as Zillow, is an invaluable resources to home buyers and sellers, it is important to seek a professional opinion of a home's worth. At Schneider Estates, Inc. we use these tools to aid our home valuation process. However, we also have local market knowledge and 15+ years of experience to add to the mix. 

To illustrate this point, here is a study that uncovers some of the differences that can arise between appraiser and buyer home valuation estimates.  


In simplest terms, a zero net energy (ZNE) home is a building that produces as much energy as it consumes over the course of the year. With federal and state wide initiatives in place, it is very likely that more energy efficient and net-zero homes will become a new norm in the near future. 
Since 2008, the U.S. Department of Energy (DOE) has coined the term "Zero Energy Ready Home" which is identified as a home with a whole new level of performance and rigorous requirements that ensure outstanding levels of energy savings, comfort, health, and durability. In 2007, the California Public Utilities Commission (CPUC) set a goal to ensure that all new residential and commercial construction will be zero net energy by 2020 and 2030 respectively. Read on for facts about and examples of net-zero homes, as well as the names of builders in the Santa Cruz, Monterey, and Santa Clara area who specialize in building these homes. 

  • Recent studies have indicated that the efficiency components of a new zero net energy home have an incremental cost, after incentives, of just $2-$8 per square foot. (California Zero Net Buildings Energy Cost Study, Davis Energy Group, Inc., PG&E, 2012). 
  • Zero net energy does not necessarily mean no utility bills. At certain times of the year the building will be putting more energy into the grid then it uses, however due to seasonal changes and use patterns, utility bills will not be zero.
  • The energy used in buildings is the second largest contributor to California's greenhouse gas (GHG) emissions. With rising energy costs, and increasing climate-related impacts and natural disasters, ZNE buildings help reduce our demand for energy and provide more resilience to climate impacts.

Read more about the California program here.
Read about the Federal Zero Energy Ready Home here

Net-Zero Homes and Builders in Santa Cruz, Monterey, and Santa Clara:
  • A prefab-home built for a Stanford professor in Palo Alto features solar panels on the roof and enormous lithium batteries designed by Tesla Motors for energy storage. See it here
  • A 2,500 square foot straw-bale home in Santa Cruz uses locally sourced materials and has one of the first Altherma air-to-water heat pumps in California. This device draws heat from the air outside and uses it to warm water both for domestic use and to power in-floor radiant heating throughout the home. Read more here
  • Here are two construction companies building high quality, pre-fab homes: Blu Homes and Bone Homes
  • Here is a Santa Cruz construction company that specializes in green building and net-zero homes: Paxton Construction


Quick Links

The Santa Cruz County Real Estate
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In This Issue

Christine's Corner

A True Story About Cars With a Lesson to Learn About Houses:

After numerous repairs and a drained bank account, my son called to say his old used Range Rover just died! This was after an engine rebuild and numerous large ticket item fixes. So why is it dead? Well, the key no longer turns on the engine. Why? Because, you see, the key actually turns on a computer that turns on the engine. That computer got a bit of water in it, and it now needs to be replaced. The cost to get to the computer is so large that it in effect renders the car with the newly built engine as worthless. When he was at the Toyota dealership looking to lease a new car, the salesman asked him about touch screen features, the new latest and greatest gadgets. All my son would say is "I want a car where the key starts the car, not a computer, and with as absolutely few electronic features as possible!" He learned his lesson well.

Does the essence of this situation bear light on the new high-tech home rage? Will we be able to turn on our lights, or anything else in the house, if there is an electrical outage, heavy rainstorms, or a malfunction in some remote part of some gadget that controls the amenities of our home? I think these are good questions to ponder before we completely embrace the IOT (internet of things) and a home where we only have to push buttons and it does everything from starting the coffee pot to adjusting the light dimmers and robotic vacuuming. It's all quite exciting; just like microwaves when they first came out, before we learned that they basically denature the food. So let's really think, what do we need in a home?

I recently saw an article about Project 333 ("Be More With Less") where you can join in and commit to using only 33 articles of clothing every 3 months, total, including accessories. I like this (I'm working on doing it, a bit each day). One psychologist talked about the benefits of having less "things". Her take: "We tend to put meaning into our things, which are really quite meaningless. There's no reason why our clothing should bring about an emotion". I agree with her, and I believe this can apply to the amenities in our home as well as the structure. I love beauty, form and function. The balance between all of those is important. However, we should also ask, what do we need in a home? How large of a home do we need? And, even more importantly, what do we not need? What would it be like to have less? What freedoms would that open up elsewhere? Think about it. You might find some treasures. Our material life is, in essence, mundane by definition. Our higher faculties have nothing to do with the material world. I am, after all, a real estate broker, and have deep feelings about homes and shelter for all people. I have a sense that in this country we need to examine how we hold the house and its amenities in our lives and minds. I sense that a bit more simplicity would bring great joy to many people. Perhaps I'll start a project for simplification of how we live in our houses. 
What do you think? Good idea?

It's also a good idea for planet Earth. This article on 4 Reasons Why Less is More for Planet Earth gives other reasoning that is more expansive: less stuff and fewer exports = less carbon and greenhouse gases, no matter where you live.

Schneider Estates, Inc.
Christine Schneider, Broker
BRE# 01749537

Issue 12
August, 2016