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“If you can, you should, and if you’re brave enough to start, you will.” Stephen King

Market Data Update

What’s Going On?

Let’s get to it

• The Federal Reserve has raised interest rates by an additional 0.25%, although there are indications that a pause in rate hikes may be on the horizon.

• In March, pending home sales dropped by 5.2% compared to February.

• As reported by Redfin, nearly half of the homes currently for sale (47%) are being sold within two weeks.

• Home prices rose a seasonally adjusted 0.45% in March from February

• According to CoreLogic's forecast, home prices are projected to increase by 4.6% from March 2023 to March 2024.

• The mortgage delinquency rate reached a record low of 2.9% in March, according to Black Knight.

The Breakdown

The Federal Reserve has increased interest rates by another 0.25% this week bringing rates to an all-time high since summer of 2007. To refresh everyone’s memory, the market is forward looking and tends to forecast the Fed’s interest rate movements. That being said, the Fed’s decision this week was already priced into the market several weeks ago, which is why mortgage rates didn’t suddenly spike up.

The rise in mortgage rates along with declining inventory have led to lower pending home sales in March. Pending home sales represent the number of contracts signed to buy existing homes for sale. Even though inventory is higher compared to last year, it has been on a downward trend since November 2022. Sellers would rather keep their homes with lower interest rates than move to a house that is potentially more expensive with a higher mortgage rate. Given this, the number of new listings on the market continues to decline.

However, new home sales increased by 9.6% in March compared to February. New home sales represent the number of contracts signed to buy new construction homes. The reason we are seeing this trend is because of builder incentives. With the chance of entering a recession, builders want to sell their inventory of newly constructed homes as fast as possible. To do so, many builders are offering incentives to potential homebuyers. Apart from adjusting their prices, builders are offering assistance with closing costs, extensions on interest rate lock periods without additional fees, discounts on upgraded amenities, and mortgage rate buydowns. Mortgage rate buydowns are very powerful in convincing homebuyers to pick a new construction home because lower mortgage rates allow them to qualify for a higher priced home or grant instant monthly savings. For example, if a builder offered to buy down your mortgage rate by 1%, that could allow you to quality for a house that costs 10% more than your original budget or save you roughly $200 a month!

Due to the surge in new home sales, builder confidence in single-family homes increased in April. As builder confidence increases, new home construction rises. In fact, the US Census Bureau reported a 4.1% increase in permit authorization for single-family homes in March. With an increase in the supply of new homes plus builder incentives, current sellers may have to compete by reducing prices. Nevertheless, if the Fed pauses on rate hikes and mortgage rates tread down, buyer demand will increase to mitigate the rise in supply.

_{Important Note: The above passage is our commentary and opinions about the real estate market, NOT financial advice.} 

Investing Tip Of The Week:

How to Calculate Cash Flow

Analyzing the cash flow of your rental properties is definitely an important component of investing in real estate. It may sound simple, but cash flow is often calculated incorrectly. Cash flow is the amount of money remaining after collecting rental income and paying all expenses.

To calculate cash flow for a rental property, you need to first determine the gross rental income. Gross rental income is the total amount of rent collected from tenants before deducting expenses. For example, if a property rents for $2,500 per month and you collect rent for 12 months, your gross rental income is $30,000 per year. Many people do not account for vacancies during the year when calculating their gross rental income. If your property is vacant for one month during the year, then that needs to be factored in.

Next, you need to deduct all operating expenses related to the property. On a high level, this includes property taxes, insurance, property management fees, and repair & maintenance costs. The repair & maintenance category encompasses two different types of expenses, capital expenses and general maintenance costs. Capital expenses are your larger expenses that improve the property and may even add value, including the replacement of a HVAC system, roof, flooring, etc. General maintenance costs are items such as appliance repairs, pest control, landscaping, and other handyman work. Even though both categories are expenses, the tax treatment on them is different, so reach out to your CPA to help optimize your taxes! Lastly, don’t forget to deduct your HOA fees if that applies to your property. Once you've calculated the total expenses for the property, you can subtract that from the gross rental income to arrive at your net operating income (NOI).

The last step is to subtract your mortgage payment from the NOI to get to your net cash flow. Mortgage payments tend to include an escrow amount for your property taxes and insurance, but since we already accounted for those expenses in our NOI, make sure to remove them from your total mortgage payment. In other words, your mortgage payment should only be the principal and interest paid.

Here is an example:

Overall, understanding how to calculate cash flow is a critical component of analyzing rental property investments. By accurately calculating cash flow, you can determine whether a property will generate enough income to cover expenses and provide a positive or negative cash flow.