I’m excited to share this week’s timely webinar with you all. I sat down with my friend and trusted advisor to many of my clients, Bill Vlahos, to get some insight on the stock market and some clarity on the “Wealth Tax.” With election results fresh on our minds, this webinar is all the more interesting to revisit.
Bill Vlahos is a highly seasoned professional and partner at Jackson Square Financial. You can read more about the services he and his firm provide on their website that’s linked below. You can also contact Bill directly via email if you’d like to chat more. And as always, don’t hesitate to reach out to me directly if you have any questions or would just like to catch up.
www.jsfin.com
Bill Vlahos: bvlahos@jsfin.com
Transcript from our call:
Ruth: Hi Everybody! I’m here with Bill Vlahos, a close friend and advisor to many of my clients. He’s a financial advisor and partner at Jackson Square Financial, a financial planning firm downtown.
We had Bill on to do a talk right as we went into shelter in place and the stock market was plummeting. Now he is back to talk to us about where the stock market is today, some interesting things that are going on with upcoming tax legislation (the wealth/SALT tax), and to discuss things like where you should be putting your money, should you be hedging against inflation, etc.. So with that Bill, I’ll let you introduce yourself and we can get started.
Bill Vlahos: It’s great to see you again! By way of background, I grew up in San Francisco and went to school at UCLA. I’m a partner at Jackson Square Financial, where we’ve been in business for 27 years. We’re 15 professionals and we provide financial advisor services to individuals and families, as well as employee benefits and retirement plans, and I do some expert witness work as well.
There’s a lot to unpack, so I’ll only cover some highlights. A lot has happened since we spoke in March. As you alluded to, we had just gone into shelter in place and the stock market had a very precipitous drop. I think when we spoke, it was down about 24% and that is after it had recovered some. In the last several months, the stock market has done remarkably well.
I’m not exactly sure why. I think we all have some suspicions — clearly the economy, to some degree, is doing better than we had expected. There is a pretty substantial dichotomy between big corporate America technology– as some described, the “haves” and the “have-nots.” And the stock market is not necessarily a reflection of all realities, it only reflects a certain reality. So in some ways, it’s expected and in some ways it’s unexpected.
Historically, the stock market has been a discounting device — meaning that it looks forward. So I think the stock market is telling you that the economy is going to continue to rebound. We’re probably in the early stages of a potentially strong economy in the future. I also think it’s telling you that a vaccine is not far away.
Ruth: Coming from a complete novice as far as the stock market goes, I read somewhere that the government initially wasn’t giving money to any of the big companies like Apple or Google as part of the stimulus package, but the stimulus package changed later on so that they did give them money. Then, those companies were actually buying their stocks back, which artificially inflated the values. Do you think that’s true?
Bill Vlahos: I do not think that’s true. If you were to just look at the math, the amount of money these companies got and reinvested in their shares would not be able to move a market. These companies trade tens of millions of shares a day and any amount of stimulus money they received and used to repurchase their stock would not move the needle at all.
One thing that’s significant is that the Federal Reserve made a very substantial change in strategy. In recent history, this is the third very significant change in the Fed. When Paul Volcker was chairman of the Fed, he wanted to kill inflation at all costs, so he would aggressively increase rates with the idea that no inflation was acceptable. That somewhat evolved and then when Greenspan was chairman of the Fed, his goal was to include financial assets, stocks, and bonds sticking, because that was an important part of household wealth creation. And now, the new Federal Reserve actually has a change in policy in which they have stated that they believe some inflation is healthy, so they are willing to tolerate some level of inflation over a fuller market cycle. They’ve signaled that they will not be increasing interest rates for a considerable period of time.
What that does is that makes financial assets more desirable (i.e. stocks & real estate). What it also does, is that it makes bonds less attractive. So fixed income investors who are relying on bonds are going to (and have been) getting lower rates of return, and I think some of that move to equities from bonds is part of the reason. The ramifications are pretty significant for the long run because investors have to really rethink their asset allocation because they won’t be generating much return from bonds. They have to think, because if they’re in a higher tax bracket, the municipals, or the tax exempt income, make sense. They could get 2-2.5%, which isn’t too much. But if they’re in a high bracket, that’s really like doing 4-4.5%. Or they can invest in the S&P 500 and get a dividend of maybe 1.7-1.8%, but they’ll have a lot more volatility. So things are getting trickier for investors, but that change in the Fed, long term, is supportive for stocks and real estate.
Ruth: So the Fed is printing a bunch of money and that is creating inflation, right?
Bill Vlahos: They’re not only creating money, they’re determined to keep interest rates lower — but yes.
Ruth: Those two things are a perfect environment for inflation. It sounds like you are very bullish on the stock market, not to say that you have any sort of biases there. I know you’re a super honest guy and you would say no matter what, but if one of your clients came to you and said, “I know you think the stock market is great, but I’m worried and I want to hedge against inflation.” What are the options there? I hear people talking about gold, which I personally think is kind of crazy. I think you should buy things that people need, and nobody needs gold in my opinion.
Bill Vlahos: I wouldn’t necessarily say I’m bullish about the stock market in general. Certainly in the short run, I would say that it’s probably a little overvalued and probably a little ahead of itself. If you look at history over the last 50 years, the S&P has done 9-9.5% percent. And maybe you discount that down a bit since the last 10 years have been pretty healthy. So I would tell clients that if you’re looking over the really long-term– like 5, 10, 20 years– is 9 or 9.5% a reasonable goal, or maybe a little less? I’d say, probably so. But I would never put any money in the stock market that someone is going to need for retirement or their children’s education in six months or 1-2 years. I’ve been doing this for about 25 years and the clients that have had the most success are people who can set it and forget it; it’s the people who invest in equities or real estate and can ride out the ups and downs. Those are people who have accumulated the most amount of wealth after tax.
I totally agree with you on gold and silver. There’s certainly periods of time where they’ve gone up, but historically gold has been a terrible investment. Since the last 100 years, its average is maybe 3%. At least with stocks and real estate, there are metrics you can use to evaluate your yield or the rate of return on the real estate and with stocks you could look at various measures and price to earnings ratio; but with gold, you can’t– it’s supply and demand. We never own gold. I agree with you, I’m not wild about it. It is a long-term asset class.
Ruth: At the risk of sounding like I’m trying to sell houses, even though that’s what I do for a living, how do you feel about shaving off some of the froth of what we’ve seen in the last year or two and investing that into some really awesome real estate?
Bill Vlahos: I’m a homeowner who has invested in real estate and I’m happy I have– it’s done really well. I’m not sure it’s “froth,” but I would say that investing in real estate is always a good idea. I wouldn’t want to give generic advice because every client is different, but yes, I would always say that a well balanced portfolio of equities and real estate is in general, a very good idea.
Obviously there are some tax benefits to real estate in terms of deductibility of mortgage and depreciation and such, but if you’re looking at stocks or real estate (or ideally both), having that longer time horizon works better. If you think about it, billions of people come to work every day, economies grow over the long run, and stocks and real estate reflect the fact that billions of people are coming to work and these assets appreciate over time. I think in either asset class, most people should own both. As long as the time horizon is long, they should have very reasonable rates of return.
Ruth: Correct me if I’m wrong, but real estate does hedge against inflation and stocks do not, is that right?
Bill Vlahos: No. Stocks are very much considered a hedge against inflation. I think both are good hedges to inflation and both have pros and cons, but if you were to look throughout history, the returns are pretty commensurate. Real estate has tax advantages and most people purchase real estate with some level of leverage, so those returns can be amplified. However, it’s like everything else; people need to make good, solid decisions based on their own situation.
Ruth: A lot of clients are telling me they want to pull a little out of the stock market and put it into real estate and buy something they can use. Lots of clients are buying second homes in and around the Bay Area primarily. I wouldn’t say it’s a new phenomena because people have always had second homes, but I would say it’s a new phenomena because of the amount of people that now have second homes. If you look at the real estate market outside of San Francisco, you will see some places like Tahoe having about 100% increases in sales over this time last year. One nice thing about putting money into real estate is that stocks are great to look at on your phone and watch climb (hopefully), but it sure is nice to have a place you can go and hang out with your family and your friends and actually use that piece of your investment as well.
Bill Vlahos: Absolutely. When advising clients, there are a lot of factors to consider (i.e. their lifestyle and their quality of life). None of us are going to be around forever, so people need to make good decisions, both academically as a textbook answer and a lifestyle answer. People who are successful at life and investing, strike that balance. They think about the lifestyle and the financial ramifications and put that all together to make good overall decisions. But I totally agree with you that that makes a lot of sense for people.
Ruth: Especially with interest rates being where they are.
Bill Vlahos: As I said, low interest rates support both asset classes, but absolutely. There’s cheap money out there and we’ll see if it has negative ramifications over the long run and we’ll see what happens with the election, of course.
Ruth: So, what’s going on with the Wealth Tax? I haven’t personally experienced this with my own clients (maybe I don’t deal with enough reeaalllyyyy wealthy people), but I’ve heard discussion about people leaving San Francisco because of this idea of a “Wealth Tax.” Can you talk about that?
Bill Vlahos: There is a lot to unpack there and we’ll have to see what happens with the elections. There are a lot of ramifications and it sort of starts with wealth taxes and it depends how liberal the country will move in terms of tax and economic policy. There seems to be at least a 50% chance that Joe Biden gets elected. More recently, he has been walking back from more liberal positions and claiming he’s very much a moderate. If he gets elected, we’ll see. And we’ll see what happens with the Senate.
I know where we draw the line at wealthy is the estate planning ramifications, which is very important. Everyone needs to see their financial advisor or their estate planning attorney and talk about their estate plan, because right now the estate tax exemption is $11.5 million. So there has been a lot of talk, especially among the democratic circles and Kamala Harris, that they want to reduce that dramatically. It was previously $5.5 million and Biden’s tax policy calls for it to be reduced to $5 million.
There are a lot of things people can do right now to lower their taxable estate, such as: gifting, they can create certain sorts of trusts, they can take discounts on real estate that’s owned in partnerships, they can take substantial discounts. If Joe Biden gets elected and there’s a Democratic Senate, it seems likely that estate planning exemption is going to come down substantially because the governments need more revenue and just optically, it looks bad for rich people to pass significant assets to their heirs without paying estate taxes.
It’s very likely that this gets enacted next June, July, September, or October and gets retroactive to January 1st. So now, and especially on November 3rd, wealthy people (who I would define as $3.5 million and up) should think about their estate plan.
Ruth: So even if someone super young had $3.5 million or more in net assets, then they should be worried about that too? Even though they’re not going to be retiring?
Bill Vlahos: If you’re young, you should especially think about that because those assets are going to appreciate over time and it’ll probably be decades before your children inherit those assets. So the answer is yes, you should do some meaningful estate planning even if you’re young because those assets are going to appreciate over time.
Ruth: I’m probably not the only one that is ignorant enough to think that estate taxes are something you don’t have to worry about until much later in life, in terms of planning. I have a trust and those sorts of things, but it’s definitely not on my mind at this moment.
Bill Vlahos: You have a trust for a few different reasons. You have a trust because if you have greater than $150,000 worth of assets and you don’t have a trust, your assets will go through probate in the State of California and the State of California will decide where your assets go– which is probably not ideal. As a part of that basic estate plan, your attorney will do durable health powers; thereby, if you’re incapacitated you’ll give your husband or someone else the authority to make those decisions. And you want to have that under the basic estate planning.
There are a lot of different kinds of trusts and the big picture is that everyone should make sure they’ve reviewed their estate plan, preferably before the end of the year.
Ruth: And then finally, SALT tax. What’s that all about?
Bill Vlahos: What happened in the last tax proposal is that Trump and the Republicans lowered taxes for most everyone, especially the lower income, but also put a limit on mortgage deduction and property taxes. So there are now limits to how much you can deduct. That obviously hurt people who live in States like California and New York.
There’s been a lot of talk about whether Biden and the Democrats would remove those SALT taxes or reduce them if they came in. I don’t think anyone really knows, nor do I think there’s a consensus; because although there is a feeling that it is unfair, there is also a feeling that it hurts primarily the wealthier people, so… who cares? I don’t know if a Biden presidency would lower the SALT tax or not. My suspicion is that they would probably adjust it somewhat to make it better, or they would somehow means test. So if you’re at a certain income, then those taxes may not go down.
Ruth: To me, it seems pretty messed up. Yes, I’m sure if someone lives in Missouri and sees someone in SF who is making $300,000-$400,000 (which is about the minimum it takes to buy an average house in San Francisco as a joint income) while they’re literally scraping by with every last penny to be able to afford their house while possibly trying to figure out education for their kids, etc., then yes, someone could look at it like, “Oh, they’re soooo wealthy.” But I guarantee you, the people making that much don’t feel very wealthy relatively speaking. It does seem like there should be some sort of adjustment made according to the cost of living.
I want to rewind to something you just said. I know we maybe have a little bit of differences in opinion on politics, but one of the things you said was that Trump adjusted the taxes down for most of the lower class. Is that really true?
Bill Vlahos: Yes, tax rates have gone down. That is correct.
Ruth: Interesting.
Bill Vlahos: The SALT tax fuel wiped out a lot of that for many people, but tax rates are now lower than they were close to four years ago. We may not see it as much, especially with the SALT tax. I know I paid more taxes.
Ruth: Yes, I paid more taxes too. Any other things going on out there that we should address that you think people might want to understand?
Bill Vlahos: The last thing I’ll say is that our firm has done a fair amount of research looking at investment returns among different political parties. Interestingly enough, there hasn’t been that much difference if it’s a Republican or a Democrat in the White House. The returns haven’t been much different.
Stock market returns have been slightly higher among Republicans, but not significantly. Under Bill Clinton, the stock market did really well. If Joe Biden went hard to the left, maybe that would change it. But for the most part, it doesn’t really matter.
Interestingly, when you look at Congress, the stock market did the best with a divided government when there were a Republican and a Democrat in the Senate and the House. The stock markets were actually the best under a divided government. Like I said, unless policies become exceedingly liberal, I don’t think there’s much to worry about.
Let’s talk about real estate.
Ruth: Real estate is good. It’s a little trickier than it has been, which keeps me on my toes. Right now the market is definitely softer than it has been in most segments in San Francisco. San Francisco is the only market I sell in, so it’s the only one I try to talk about; although I did mention some surrounding markets that I have some knowledge of because of what my clients are dealing with in other markets when they’re buying a second home or something like that, which I can always help people with.
It will be interesting to see what happens. I was having a call with some of my trusted colleagues in San Francisco, where we brainstormed and discussed things like, “Are you holding listings starting in November? What are you doing?” There’s this thing that happens in San Francisco where Realtors like to talk about seasonality. Sometimes I wonder if we just create seasonality so that we can all go on vacation. It’s as if we have collectively decided to tell all of our clients, “This is the time you buy. December I’ll be gone and there won’t be any buyers here so you can’t sell and you can’t buy.” I don’t know what came first, the chicken or the egg, but there is definitely seasonality.
Traditionally (election aside) you would see listings start to slow down in November. This year I think the election is on a lot of sellers’ minds. One of the people on this call said, “Well, is it on buyers’ minds?” And we were all kind of like, “Actually, buyers aren’t really talking about it. They don’t seem concerned about it.” In fact, my buyers are just trying to hurry up and buy before all of the inventory goes away, but sellers are certainly concerned about timing around possible civil unrest. They’re trying to decide whether there is going to be civil unrest in November because of the election, if there is going to be civil unrest in January because of the inauguration, or if there is not going to be any civil unrest at all. How will that affect things? So we are just preparing for things.
I took a listing recently that a tenant moved out of, and we’re going to prep it and by the time it gets ready, we’ll be into November. So we’re just going to decide at the time if we’re going to list it then or if we will wait. More than likely, I think we’ll probably push through if things don’t feel very different. I don’t like to try to predict markets, and I know the past is not supposed to be a prediction of the future, but traditionally, fall is softer because there’s a lot of inventory every fall. Then, there’s a lack of inventory for about 2-4 months. Then you end up with pent-up buyers and inventory that’s coming on very slowly in the spring. So you see a lot of spring loaded appreciation in San Francisco because of that phenomenon. It will be interesting to see whether or not that happens this year.
Bill Vlahos: I assume there is a significant delta between condos and single family homes in San Francisco.
Ruth: Yes. We’re all trying to figure out exactly where the data is for condos right now. It varies by neighborhood, but a condo market at a minimum is down 10-15%, but I did hear some condos recently that sold for 50% less than previous highs.
Bill Vlahos: Are those buildings with elevators?
Ruth: Yes. I don’t think that’s indicative of what’s going to happen across the board, but there are going to be some sellers who are just done and need to let go; these are sellers who bought a long time ago and are willing to part ways for numbers that other sellers who bought 3 or 4 years ago are not. If there’s enough of those (and I don’t think there will be) it will become the new comp and people will say, “Well, I don’t want to pay more than that.” So we’ll see what happens.
In the housing market, I’m mostly seeing a divergence between what I would call a “perfect home” and a home that maybe has some sort of deficiencies (i.e. it’s at a high price point but doesn’t have a perfect layout or maybe the pest inspection came back at a large amount). I’m seeing those houses with “deficiencies” getting significantly less; they can be down about 15 or 20%.
If you can see those deficiencies as a buyer and say, “Oh, I can get a $400,000 discount here because I’m taking on a $50,000 problem,” that’s a really good buy. But, some buyers (I think the majority of buyers) in these situations start thinking, “Oh my gosh, what if 3 years from now the market is soft and what if I overpaid? And then I have a problem selling at that point.” So buyers become very cautious around buying properties with “deficiencies.” That’s what I’m mostly seeing out there– a big divergence between those two products.
Bill Vlahos: What are you seeing in terms of valuation or costs between San Francisco and Marin? Is it getting closer to parity?
Ruth: That’s a great question. I don’t know the answer to that. I’d have to ask some of the great Marin agents that I refer business to. From my recollection, it was only slightly different before– maybe about 20% less than San Francisco. But I’ve heard that prices are up 20%. So my guess is that it’s about the same now, or maybe only slightly less.
Previously, a lot of our sellers were buying and selling within the city. So if you’re selling in a down market and you’re buying in a down market, it really shouldn’t matter. If you sell in a high market, you buy in a high market. But this is the first time in my 10 year career that the San Francisco market is down and the markets all around it are up. And a lot of people are wanting to go to those markets. So it is really painful to sell low here, and then go deal with a hot situation elsewhere.
Then there are some people who are deciding to hightail out of here to Austin, San Diego, Colorado, Seattle, etc… In which case, even a hot market there still looks pretty darn good coming out of a softer market in San Francisco.
Bill Vlahos: It will be interesting to see because although no one knows the exact time, a vaccine is coming. So at some point this virus will be defeated in the not too distant future. The interesting question is, what happens in the commercial office space? 2 or 3 years from now, will companies still allow their employees to work at home? Will they require them to come to their downtown office? And if they do, I assume that would be very supportive for San Francisco real estate. Do you have an opinion on that?
Ruth: My guess is that commercial real estate is definitely going to be on sale, if it’s not already. I’ve actually had that conversation with my husband. We’ve discussed whether this could be a good time for me to buy an office for myself and my staff.
Bill Vlahos: What about San Francisco’s problem of having a DA who won’t prosecute crimes? I live in San Francisco and I’m on the board of our neighborhood association and crimes are off the charts. I bought our house 19 years ago and there had never been a break in on our block until recently, when there have been 4 in the last 6 or 7 weeks. Is that also contributing to the lack of attractiveness of San Francisco real estate?
Ruth: I think it is. Our city politics really need to change and everybody needs to get involved and figure out who to elect in what districts. I think the supervisor votes are really important right now. That is one thing people are talking to me about when they’re leaving, they’re telling me they cannot deal with the amount of homelessness and crime.
There’s got to be a way that we’re taking care of people, but still preserving our city and keeping it clean and safe; there has to be. It has gone down substantially and COVID really brings a magnifying glass to it more than ever before. You’re right; it’s not great and not sustainable. There has to be a change.
Bill Vlahos: If I’m a contrarian real estate investor, there’s a part of me that says I would buy a condo in an elevator building because I’m pretty confident that at some point we’ll be done with COVID. What neighborhoods do you see as especially attractive now? What neighborhoods do you look at and say, “Wow, that’s a really good opportunity in a nice neighborhood, especially for families.”
Ruth: It depends on what your plan was. If you’re making it a pied-à-terre or something that you’re going to use very soon, then that’s one thing. As far as rentals and investment properties go, for condos or single family homes, we generally don’t pencil out very well over $2 million. I once had a super wealthy hedge fund client who rented a $7 million house who told me he would never buy because he was paying about $18,000 a month in rent, but if he had a mortgage on it, it would probably be around $30,000-$40,000 a month. It just doesn’t ever make sense to rent for that high of a price point, but the rent by calculation can get at least somewhat close to even if you buy below that $2 million point. To answer your question, a single family home is always a better investment in the long-term in San Francisco because there’s only so many of them, but if you’re looking for a screaming deal right now, then you’re definitely right. A high rise condo is a good place to get an investment.
I’d have to actually look at the charts, but I’ve heard people say this and I think it’s true, that in every recession within three years after the recession in San Francisco for the last 30-40 years real estate has risen 100%. If that’s true (and I’d have to look to be sure that it is true) then you’re going to get that appreciation in either product when buying that low.
The thing is, the housing market hasn’t gone down as much as the condo market. But if you can find one of those houses that’s got a deficiency you can fix (i.e. adding parking or fixing a pest report, etc.) and you get that huge advantage, and you can rent it out, then I think it’s absolutely a great time to buy of course, understanding also, that rents are way down. So if you’re holding it as an investment, there’s definitely some considerations to be made there. You’ll probably need to plan on taking some losses for the short term, in order to make some really nice gains in the long-term, which is going to feel really risky but that’s where the big returns are.
Bill Vlahos: And Tahoe and vacation destinations that are hot now, do you think that will continue?
Ruth: I do not.
We were in contract on a home in Tahoe, and the price that we paid for it is about 20% higher than it was six months ago. I knew that going in eyes wide open. Given the brief amount of research I did, I think it very well could come down. What the local agent told me is that it isn’t just second home buyers, it’s also people who are moving to Tahoe that are increasing prices.
I wonder how these people who are coming to Tahoe from the City during the snow (thinking it’s going to be super fun to live in Tahoe) are going to feel the first time they shovel snow. They may think, “You know, this sucks!” It’s fun to visit when it’s not your primary home. So I do wonder how well those markets will hold up. For us, we just decided this is going to be a long-term thing. We’re going to hang out with our grandkids there someday. I think that’s the attitude you should have as opposed to buying something with the intention of maybe selling it in 2 years, because you could definitely lose your shirt on it.
Bill Vlahos: Just like the stock market.
Ruth: Exactly. There are so many clients I’ve had over the years that have told me in our buyer meeting, “I’ve been waiting to buy in San Francisco for 10 years and I kept thinking that it was going to go down.” So part of me wanted to wait six months before buying in Tahoe to see if it will go down, but it may not. The reality is, I want the house now and I have the money to buy it, so let’s just do it.
Bill Vlahos: Going back to what I said earlier, is that people who really have that long time horizon, they’re the ones that really accumulate the most wealth over longer periods of time in the most tax efficient way.
Ruth: You have to stay calm and cool. I’m on a couple of forums with some of my Tony Robbins Platinum people and there’s a few of them that are constantly like back and forth about what they should do with this stock and that stock and buy this and trade that. And I’m just like, “Really? I don’t want to think about that.” I just put it in, forget it, and go do my job. I’m not a trader.
Bill Vlahos: Any closing thoughts?
Ruth: Thank you so much for coming on. In closing, I would say that if anybody has any further questions about the stock market or financial planning, call Bill. And if he doesn’t know the answer, he always knows the right person who does.
Bill Vlahos: Have a great afternoon and spend some time with your beautiful children. I appreciate it.
Ruth: Awesome. Thanks for talking. Take care Bill.
Thinking of buying or selling? Call the Krishnan Team at 415-735-5867 for a no-obligation consultation. You can also email us at info@ruthkrishnan.com.
