Home appreciation in the peninsula over the past 30 year?

Asked by Jonathan Stilman, Palo Alto, CA Fri Nov 21, 2008

Hi there,
My wife and I sold our home in '07 and have a significant capital gains, as it seems we sold at the peak of the market. I am considering whether I should purchase again to mitigate our tax bill, but am very hesitant to put money back in real estate.

My question is whether anyone can point me to historical home appreciation data for homes in the $3M in today's dollars. I have found data online which suggest overall housing has appreciated at 9%. However, I've seen some data that suggests that the rate of return is much lower for homes worth over $2M, as low as 2%.

To clarify the question, I am interested how much on average a home purchased in 1978 for > $1M (inflation adjusted) has appreciated in the last 30 years. Any info would be appreciated.

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Palo Alto Re…, , Palo Alto, CA
Tue Feb 3, 2009

I have asked real estate agents the same question and there does not appear to be a database that contains all the information needed to compile a comprehensive analysis that dates back that far. Let us know if you come across anything. Instinctually, one would think a home in the 1-2 million dollar range in Palo Alto will have more room to appreciate annually than homes in the 3+ million dollar range because of the smaller buyer pool at the 3mil price level-- which probably isn't going to change (taking account 3mil adjusted for inflation over time).

Also, please consult your CPA, but I believe the deadline for a 1031 exchange has passed on a 2007 sale.

9 Isabella in Atherton was a property that was subdivided. Someone bought it for land value in 1988, subdivided it, and built a spec home on the new '9 isabella', in 1990.
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Arn Cenedella, Agent, Greenville, SC
Fri Dec 12, 2008

Please consult with your CPA or tax attorney but in my opinion buying another home NOW will do nothing to mitigate your tax bill for a 2007 sale.

The current law on taxation of the gain resulting from the sale of a personal residence has NOTHING to do with what you purchase. The current law is simple - a married couple can exclude $500,000 of gain from taxation on the sale of a personal residence - a single person can exclude $250,000 of gain from taxation. That is it - PERIOD. The purchase of another home does not enter into the calculation at all.

Years ago, the rule was different. Back then (10 years ago????) one could defer ALL of the gain from the sale of a personal residence provided one bought another personal residence that cost at least $1 more than the old personal residence. This rule no longer exists.

Be happy that you sold near the peak but my sense is you will have to pay tax on that sale if your gain was over $500,000.

So do not buy another house if your only motivation is to pay less tax on your 2007 sale.

Please let me know if you have further questions.

Arn Cenedella
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Marco, Home Buyer, Palo Alto, CA
Wed Nov 26, 2008
Hi matthew,

You raise a good point in terms of checking that the original subdivision remains intact when comparing home appreciation. I'll keep that in mind as I do more research.

To clarify a couple of points, the AMT consideration is very real in my case. There is simply no tax incentive to home ownership in this price range. The same is true for a number of my colleagues. In general, people who look to purchase in this range would be affected in the same regard.

You touched upon the key question that many buyers on this fence like me are facing. Home appreciation has been 10-15% in the past decade. However, can we expect this trend to continue in light of a tight realignment of credit availability? From the limited data I can discern, this recent appreciation is a historical anomaly, which implies a regression to the mean is due. Jonathan was fortunate to sell when he did.

My comment about changing demographics is related to this. In light of an aging population nationwide, there simply will be less demand for large homes and an increased supply as people retire, regardless of estate planning on their side.
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NonRealtor, , 23456
Tue Nov 25, 2008
You did good Jonathan--not many people saw the bubble. Sounds like pretty good timing. Good Luck to the folks you sold to. I would say Good Luck to you, but you don't need it.
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David Blockh…, Agent, Los Altos, CA
Mon Nov 24, 2008

I suggest that you speak with a tax specialist. I am not aware how you could mititgate your capital gains by purchasing another property. That sounds like the old "move up" tax rule. There is no roll over exemption.
Web Reference:  http://www.losaltoshomes.com
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Marco, Home Buyer, Palo Alto, CA
Mon Nov 24, 2008
Hi Jonathan,

I am actually interested in the response to this question as I am also considering a purchase in this price range. As matthew mentioned, I've had difficulty to find a believable data set. On an anecdotal basis, you can find examples such as the one matthew described . However, you can also find many counter examples:

Take for instance 9 isabella in atherton. It sold in '88 for $2,130,000. It was recently on the market for $2,695,000, with the original listing price > $3,600,000. It is currently off the market, although I am not sure if it indeed sold. If you assume it sold for its asking price, it represents a 1.1% return on your money, which doesn't even cover your property tax bill. It probably did not even get offers at its current level, which makes stacks the example further against a purchase of this size

From what I have been able to discern, homes in the upper price range appreciate much more slowly than the rest of the market. Two reasons are that the tax incentive for fome ownership is capped at $1M. In addition, AMT makes it that in most cases home interest and property taxes are not tax deductible for people who can afford these purchases. Going forward an aging population which presumably wants to divest itself of larger properties will likely put increased downward pressure on homes in this price range.

I've come to the conclusion when I do buy a home it will be for the lifestyle in might afford my family, but I am not counting on any financial gain in long term ownership. You should seriously consider buying again if you only are doing it to avoid cap gains.
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