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“If you don’t like where you are, move. You are not a tree.” Jim Rohn

Market Data Update

What’s Going On?

Let’s get to it

• Home affordability continues to be an issue as the typical homebuyer’s monthly housing payment hit an all-time-high of $2,538

• A new federal rule, effective May 1^st by the Biden administration, will make it that homebuyers with good credit will have to pay higher mortgage rates and fees to subsidize people with riskier credit.

• New home sales increased by 9.6% whereas existing home sales declined by 2.4% in March compared February.

• Mortgage applications increased by 3.7% compared to last week.

• Fannie Mae anticipates home prices to decrease by 1.2% in 2023 and forecasts an additional 2.2% decline in 2024.

The Breakdown

There is a lot of fear in the commercial real estate market right now. Even though we generally focus on residential real estate here, it may serve well to address these concerns.

Thanks to “work from home”, we currently have about 20-30% empty office space. In addition, almost a quarter of office building loans need to be refinanced this year at much higher interest rates compared to last year. Due to this, the market value of office buildings has taken a hit this year and might continue to fall. When interest rates and vacancy rates are high, banks are less willing to finance these office buildings without tighter terms and conditions. As such, we could potentially see the number of defaults related to commercial real estate increase. This would start a dicey cycle since banks that hold commercial mortgages would be exposed to more risk. The last thing we need is another banking crisis after Silicon Valley Bank.

How does this impact you or the residential housing market? Theoretically, an extended decline in the value of commercial mortgages can cause deposits to flow out of the “risk exposed” banks. This would force those banks to tighten their lending to not just developers, but to all customers. Credit tightening (a.k.a. credit crunch) can make it much harder for people to qualify for personal loans or home mortgages.

But realistically, I don’t think this is going to happen. The commercial mortgage market is relatively small. About three-fourths of commercial real estate debt generates enough income to pass banks’ refinancing standards without major changes. And the delinquency rates for commercial real estate are still lower than pre-pandemic levels. Let’s not forget, commercial real estate is comprised not only of office buildings, but also apartment complexes, restaurants, hotels, malls, etc. Not all these types of properties are experiencing similar issues to office buildings. In fact, the national retail vacancy rate is at 5.7% and the national apartment rental vacancy rate is 5.8%. That’s not bad at all.

Overall, there is much to worry about in the commercial real estate market right now, but it may not be as dramatic as it sounds. I don’t necessarily think that the issues in the office building sector will drag down residential properties since we are witnessing opposite trends in both markets. However, it’s good to stay cautious and up to date!

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

Investing Tip Of The Week:

Is Cash Flow Important?

Real estate investors who buy rental properties often refer to cash flow when talking about their investments. Cash flow is essentially the income left over after collecting rent and paying for all expenses related to the property such as mortgage, taxes, insurance, maintenance, etc. It is important to consider cash flow when investing in real estate, but its significance varies based on your goals.

Let’s take the example of two individuals: Person 1 is a 50-year-old looking to create passive income to support retirement while Person 2 is a 30-year-old looking to diversify their investments. They come across a property for sale in a great location for potential renters. The property costs $300,000 and generates $2,000 in rental income per month. Both Person 1 and Person 2 are willing to put 20% down and take out a 30-year mortgage at 6% interest, bringing their mortgage payments to around $1,440. Additional expenses, such as property taxes, insurance, and maintenance fees, total to $560, making the total expenses equal to the rental income.

For Person 1, this property would not be an ideal investment because it does not generate any cash flow. Person 1’s goal is to create additional sources of income, and a property that breaks even or potentially generates negative cash flow would not be helpful in achieving this goal. But for Person 2, this property might be a great investment. Sure, the property does not produce steady income today, but Person 2 has the gift of time. Over the long run, the property will appreciate, rent will increase, and the tenants will continue paying down the mortgage. By the time Person 2 is ready for retirement, the property will be fully paid off, generating a positive cash flow upwards of $1,500 every month.

While cash flow is an essential metric to consider when investing in real estate, it is not the only factor that determines success. Several other variables such as opportunity cost, time, and appreciation should also be considered while evaluating a potential property. Therefore, it is important to tailor the investment strategy to your goals to determine if a potential property is worth the investment.