California is riddled with a multitude of entrenched problems related to its housing market. Foremost among them is Proposition 13. It sounds innocuous enough, but the wide-ranging implications of this piece of legislation are having a dramatic effect on the real estate market in California.

Some 41 years ago, on June 6, 1978, the California state legislature passed Proposition 13, reducing property tax rates on rural, commercial, and residential property by approximately 57%. Before this law was introduced, property taxes hovered around 3% of the market value of the real estate.

No limits on rate increases existed, meaning that astronomical increases in property taxes were possible based on appreciating market value.

With Proposition 13, taxes were frozen at the assessed levels from 1976, and a 1% rate cap was implemented on property tax increases. Any amendments to Proposition 13 require a two-thirds majority in the state legislature.

In simple terms, anyone who owns real estate from back in the day pays property taxes based on the purchase price of the property back then, not at the assessed value of the property. This has far-reaching implications for local, county, and state revenues. As a case in point, a property purchased in San Francisco for $50,000 in 1976 is assessed at property taxes for $50,000 valuations, not the median San Francisco house price of $1.4 million.

Not only does Proposition 13 disincentivize real estate sales, but it also alters the balance of the property market. Owners will not sell their properties given the high costs of property taxes that they will have to pay if they purchase other properties across California.

Given the astronomical spike in housing prices across the Golden State, these legacy assets are simply transferred down the line to family members, keeping wealth in the hands of those who own property and making it impossibly difficult for new homeowners to enter the market. Much debate centers around Proposition 13 and how the housing shortage is impacted by entrenched legislative frameworks and bureaucratic red tape.

Unfortunately, this is but one of many challenges facing the California housing market. Silicon Valley companies have experienced a substantial upswing in economic activity, leading to massive numbers of job hires across the board.

In fact, since the 2009 global recession, California high-tech enterprises have hired hundreds of thousands of workers, starting with Apple Inc, Alphabet Incorporated, Tesla, Google, Facebook, and others. As of 2018, Apple employs some 123,000 workers globally, Google has added 60,000+ employees since the end of the recession, and Facebook has increased its workforce to 25,000 global workers in the 9 years since the global recession.

Catering to middle-income earners in a high-demand market

Property developers across California face a choice: develop, remodel, and market to high-end renters and consumers, or cater to lower-to-middle-income groups and try to bring about real change. The property market faces a severe imbalance in terms of demand vs supply. McKinsey & Co issued a report in 2016 stating that 3.5 million homes would need to be built across California by 2025to meet the current housing crisis.

Current development is barely a fraction of that. Real estate developers in the hardest-hit areas, notably San Francisco, Oakland, San Jose, San Diego, et al are faced with many challenges. One such property developer, based in Oakland California is Danny Haber of oWOW. As the co-founder of this vertically integrated company, he has won praise from several ranking companies and personalities, including Lowney Architect, the former vice mayor of Oakland, Annie Campbell Washington, and the former leader of the Black Panther Party, Elaine Brown.

oWOW maintains a small team of highly experienced property developers. The company has enjoyed tremendous success with multiple projects across the Bay Area, notably 674 23rd Street, where 24 fully refurbished units were leased within four weeks. A flexible walls system known as ‘Magic Walls’ is used to transform a standard one-bedroom apartment into a multi-bedroom/multi-bathroom apartment which can accommodate multiple people.

This particular project is a live/work tenement, where people have the ability to run their businesses from home in luxury-style living facilities. The 674 23rd Street development now features a broad spectrum of employed people, ranging from SME employees at all levels, entrepreneurs, artists, educators, and the like.

Before the building was remodeled, it was red-tagged as a result of a fire next door. Now, this ‘MacroUnit’ building features flexible living spaces and beautiful accommodations below market price.

How to implement cost-cutting measures in burdened housing markets

The mere concept of ‘housing redefined’ as proposed by Haber and oWOW is taking the Oakland property market by storm. Since many developers continue to focus their efforts on high-end rentals, a large swath of the populace is ignored. Providing housing for the masses is strategically important for the success of communities since it tackles multiple challenges simultaneously. It relieves pressure on the homeless situation and provides dignity and stability to lower-to-middle-income earners desperately in need of housing in the Bay Area.

While the median sales price for Bay Area homes in September 2019 dropped to $810,000, they still remain the highest in the nation. However, San Francisco is not the most expensive rental market in the Bay Area according to Rent Cafe.

Palo Alto is the most expensive with rentals starting at $3,857 per month, with the cheapest Bay Area rentals in Vallejo at $1,773 per month. The solution to the rental dilemma, as evidenced by current projects in Oakland is mass-produced housing parts built offsite which can then be delivered to market quickly and cost-effectively. Affordable and luxury housing needn’t be paradoxical objectives – oWOW has already proven that.

Source:  We Buy Houses Palmdale

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