1. Property tax valuation will only be reduced IF the fair market value of the property has dropped to below the tax basis for that property. If you purchased a home for $1,500,000 last year (so tax basis is $1,500,000) and it is now only worth $1,300,000, you almost certainly would be granted a reduced tax basis. But if you purchased your property for $800,000 ten years ago and the basis has increased the full 2% per year allowed in each of those ten years, your tax basis will still only be $975,196 and your property value would have to drop below that amount to qualify for a reassessment;
2. The reduced valuation is temporary. If prices go back up again, your tax basis will go back up again;
3. As property values start to increase again (and they will!!) reassessments are not limited by the 2% rule until you basis gets back to where it was before, at which time the 2% annual cap is reinstated. So, if there is a dramatic upturn in home values (which seems to happen frequently on the peninsula) it is possible your tax relief may be short lived. Still, nobody likes paying taxes and even temporary relief is welcome.

• The tax relief is limited to principal residences;
• The tax relief is limited to acquisition indebtedness plus improvements on the property. Second mortgages and equity loans are not covered unless they were used to acquire, construct, or substantially improve the home.
• The tax relief must have occurred in 2007, 2008 or 2009.
• The tax exemption is limited to $2,000,000 ($1,000,000 for married individuals filing separately.)
• If the debt relief is part of a restructuring where the principal balance is lowered, the basis of the house is lowered by the same amount. This will lead to a larger profit if the house is sold at a later date and could lead to taxation at the time of sale if the profit exceeds the $250,000/$500,000 exemption for the sale of a personal residence

As we wind down 2007 and try to get ready for another new year, I find myself pondering the current state of real estate and how to prepare for another year of uncertainty. And I count my blessing, for I happen to be one of the fortunate agents who work in one of the areas least impacted by the mortgage meltdown on 2007. In fact, I have been reviewing sales statistics for the past 8 years and this year is no exception… even though the number of sales is down, the average and median prices of homes in this area have continued to increase. In fact, November and December were busier than normal, at least for me! So, what is going on here?

First of all, statistics can be very deceiving. While it is true that the average and median prices have continued to increase, it is also true that the low priced end of the market has stagnated somewhat while the higher priced properties continue to sell, even with multiple offers. That has the effect of raising both the average and median sales prices, although side by side comparisons of similar homes (same size, same street, same design) sold in any month this year compared to the same month last year could yield quite different results. The bottom line here is that it depends where you are looking. East Palo Alto, parts of Sunnyvale and Redwood City, and parts of Sam Mateo, east of highway 101, for example, are definitely in trouble, whereas Palo Alto, Menlo Park, Atherton, Los Altos and other higher priced mid peninsula cities are still very much in demand, even given the normal seasonal slowdown.

Secondly, having obtained my California real estate license in 1980, I have been through a cycle or two already. When I started, in the early 1980's, interest rates were sky high and it was almost impossible to sell a house without owner financing or some "creative" financing as we used to call it. In the early 1990's we were in another funk. This time the entire nation (including the bay area) was in a recession and we had also experienced the 1989 Loma Prieta earthquake. Not only were a lot of people losing their jobs and moving away, there were also a lot of retirees who decided, after the earthquake, to pull out stakes and move somewhere "safer." In many areas of the country it took almost 10 years for housing prices to rebound from these economic effects, but not here. Locally, each of those real estate downturns lasted 4 years at most before the market rebounded and took off again. The mid peninsula, and specifically Palo Alto, was among the last to become affected and the first to rebound.

The resilience of our local market was further tested when the dot com bubble burst. In the dot com heydays, Palo Alto was ground zero. It seemed as if everybody in the world wanted to be here, and real estate prices spiraled into the stratosphere. When that bubble burst there were dire predictions, and in 2002 it looked like the predictions might come true. The market had definitely softened and prices had slipped, although not precipitously. But all of that changed again when the FED started lowering the interest rates. The effects were almost instantaneous as buyers who had previously been frozen out of Palo Alto suddenly found they could afford to buy here. The pent up demand, fuelled by the great weather, the beautiful setting, the low crime rate, the high ranking school district, the proximity to world class universities, almost unlimited economic opportunity, and a host of other factors, saved the day and we were off to the races again.

I don't know what the next year will bring. We never do. But I do know this. Whatever happens, there will be opportunities for buyers and opportunities for sellers, and challenges for real estate agents. But we will all survive. All I can say is "hold onto your hats… it will be a fun ride!!"

Happy New Year!!