Friday, December 20, 2019

Phoenix Metro Housing Forecast in 2020

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Payam H. Raouf, Designated Broker
Phoenix Metro Housing Forecast 2020
The FHA floor will increase from $314,827 to $331,760 for single-family home loans. The increase includes all counties under HBACA jurisdiction, Maricopa County, Pinal County, & Yavapai County. The FHA national low-cost area mortgage limit of $331,760 is set at 65% of the national conforming limit of $510,400.

DOES THAT MEAN PRICES ARE GOING UP 6.5% IN 2020?
NOT REALLY, WE ALREADY HAVE HAD HALF OF THAT PRICED IN LAST YEAR IN 2019. SO, I WOULD EXPECT ABOUT 3% MORE THIS YEAR.
WE ARE GOING TO WITNESS SOME MORE CREATIVE LOANS COMING TO THE MARKET LIKE IN THE 2004/5/6 AND THAT COULD BE A BIT OF CONCERN.
BUT AS LONG AS THE WATERS REMAIN CALM INTERNATIONALLY AND AT HOME, - !!!! - IT IS TIME TO PREPARE FOR THE WINTER AND DO WHAT THE ANTS OF MESSOR DO!


While sellers may be able to ask more for their homes, they’re likely to get fewer offers in total due to more buyers being priced out of the market.

How much higher can rents go in Phoenix Metro in 2020 ?
In the last 10 years rents have gone up 60% in Phoenix Metro Area and half of that has been since 2012.

Let's put that into perspective: if the rent for a 4 bed room 2 bath approximately 2400 sq ft house built in 2000 or newer with no pool in Surprise AZ was around $1200 in 2012, it is around $1600 today. If this house was worth $200,000 in 2012, it is now worth about $270,000. With a cap rate of about 7%, $200,000 X 7% = $1200 and  270,000 X 7% = $1600. 

How much has income growth been since 2012 in Phoenix Metro ?
Unemployment has gone down from 10% in 2012 to slightly below 5% and it is estimated to go even lower in the next 12 months. Jobs are in abundance and growth is compensated for the huge migration to Arizona, approximately 272,000 in 2018 and a bit more in 2019 and expected to even be more in 2020.

Households in Arizona have a median annual income of $56,581, which is less than the median annual income of $60,336 across the entire United States. 

Average cost of utilities (electric, gas, water, sewer, trash, and cable) is about $600 a month. $1600 rent + $600 utilities = $2200 X 12 months = $26000 which is almost 50% of the Annual Household Gross Income.   With 3% increase in income per year, we can estimate the income grow to about $61,000.

We estimate an increase of 3% increase in rent in 2020. Cost of living is still kind of low in Arizona comparing to neighboring states and major metropolitan areas. So the same house at 3% price and rent increase for the next 3 years will be around $300,000 and the rent will be about $1750. 

Your Arizona Market Report, SURPRISE ARIZONA
Review the below table for a real estate investment analysis over a five year period. 
DISCLAIMER: This is an estimated projection and used as an example for the purpose of this article. Readers are advised to conduct their own due diligence before making any investments. Market projections are subject to change. 

ACQUISITION DATA
LOAN DATA
DEPRECIATION
Price
270,000
Interest %
4.50%
Land
15%
Dn. Pymt.
54,000
No. Yrs.
30
Improvement
85%
Loan Amt.
216,000
Mo. P & I
1,094
No. Yrs.
27.5
Buy Costs
2,700
Yr. P & I
13,133
Yr. Depr.
8,553
Cap Impr.
3,000
ANNUAL OPERATING INCOME
Yr.1
Yr. 2
Yr. 3
Yr. 4
Yr. 5
Increase in income
3.00%
3.00%
3.00%
3.00%
3.00%
Expected Gross Income
19,200
19,776
20,369
20,980
21,610
less Vacancy/Collection losses
1.00%
192
198
204
210
216
EFFECTIVE GROSS INCOME
19,008
19,578
20,166
20,771
21,394
(EGI)
ANNUAL OPERATING EXPENSES
Yr. 1
Yr. 2
Yr. 3
Yr. 4
Yr. 5
(Increase in expenses)
1.00%
1.00%
1.00%
1.00%
1.00%
Property Taxes
2,000
2,020
2,040
2,061
2,081
Insurance
800
808
816
824
832
Electricity
0
0
0
0
0
Gas
0
0
0
0
0
Oil
0
0
0
0
0
Water
0
0
0
0
0
Trash
0
0
0
0
0
Management
6.00%
1,140
1,175
1,210
1,246
1,284
Repairs/Maintenance
2.00%
380
392
403
415
428
Advertising
0
0
0
0
0
Telephone
0
0
0
0
0
Other
65
66
66
67
68
Other
0
0
0
0
0
Other
0
0
0
0
0
TOTAL OPERATING EXPENSES
4,386
4,460
4,536
4,613
4,693
Op. Expenses as %age of income
23.07%
22.78%
22.49%
22.21%
21.94%
NET OPERATING INCOME
14,622
15,118
15,630
16,157
16,701
(NOI) excluding financing costs
CASH FLOW (BEFORE TAXES)
Yr. 1
Yr. 2
Yr. 3
Yr. 4
Yr. 5
Net Operating Income
14,622
15,118
15,630
16,157
16,701
 -Yrly. P & I
13,133
13,133
13,133
13,133
13,133
CASH FLOW (BEFORE TAXES)
1,489
1,985
2,496
3,024
3,568
TAX BENEFIT
Yr. 1
Yr. 2
Yr. 3
Yr. 4
Yr. 5
Net Operating Income
14,622
15,118
15,630
16,157
16,701
 -Annual Interest
9,649
9,489
9,321
9,146
8,963
 -Annual Depreciation
8,553
8,553
8,553
8,553
8,553
Taxable Income
-3,579
-2,923
-2,244
-1,542
-815
x Investor's Tax Bracket
20.00%
20.00%
20.00%
20.00%
20.00%
20.00%
TAX BENEFIT
716
585
449
308
163
MORTGAGE PRINCIPAL REDUCTION
Yr. 1
Yr. 2
Yr. 3
Yr. 4
Yr. 5
Start of Yr. Balance
216,000
212,515
208,871
205,059
201,071
 -End of Yr. Balance
212,515
208,871
205,059
201,071
196,901
TOTAL PRINCIPAL REDUCTION
3,485
3,645
3,812
3,987
4,170
PROPERTY APPRECIATION
Yr. 1
Yr. 2
Yr. 3
Yr. 4
Yr. 5
(Increase)
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
Start of Year Value
270,000
278,100
286,443
295,036
303,887
End of Year Value
278,100
286,443
295,036
303,887
313,004
TOTAL ANNUAL APPRECIATION
8,100
8,343
8,593
8,851
9,117
FINANCIAL ANALYSIS
RETURN ON INITIAL EQUITY  (Assume Initial Equity = Down Payment + Capital Improvement)
Yr. 1
Yr. 2
Yr. 3
Yr. 4
Yr. 5
Cash Flow (Before Taxes)
1,489
1,985
2,496
3,024
3,568
Tax Benefit
716
585
449
308
163
Debt Reduction
3,485
3,645
3,812
3,987
4,170
Appreciation
8,100
8,343
8,593
8,851
9,117
$ RETURN ON INITIAL EQUITY
13,789
14,557
15,351
16,170
17,018
INITIAL EQUITY:
Down Payment
54,000
54,000
54,000
54,000
54,000
Capital Improvement
3,000
3,000
3,000
3,000
3,000
TOTAL INITIAL EQUITY
57,000
57,000
57,000
57,000
57,000
% RETURN ON INITIAL EQUITY
24.19%
25.54%
26.93%
28.37%
29.86%
RETURN ON TOTAL EQUITY  (Assume Total Equity = Start of Year Value - Start of Year Loan Balance)
Yr. 1
Yr. 2
Yr. 3
Yr. 4
Yr. 5
Cash Flow (Before Taxes)
1,489
1,985
2,496
3,024
3,568
Tax Benefit
716
585
449
308
163
Debt Reduction
3,485
3,645
3,812
3,987
4,170
Appreciation
8,100
8,343
8,593
8,851
9,117
$ RETURN ON TOTAL EQUITY
13,789
14,557
15,351
16,170
17,018
TOTAL EQUITY:
Beginning of Year Value inc. Cap. Imp.
273,000
281,100
289,443
298,036
306,887
Begining of Year Balance
216,000
212,515
208,871
205,059
201,071
TOTAL EQUITY
57,000
68,585
80,572
92,978
105,816
% RETURN ON TOTAL EQUITY
24.19%
21.23%
19.05%
17.39%
16.08%
ESTIMATED SALE PROCEEDS (AFTER EXPENSES & TAXES)
Yr. 1
Yr. 2
Yr. 3
Yr. 4
Yr. 5
ADJUSTED COST BASIS
Original Basis
272,700
272,700
272,700
272,700
272,700
+ Capital Improvements`
3,000
3,000
3,000
3,000
3,000
+ Sales Costs
6.00%
16,686
17,187
17,702
18,233
18,780
- Accum. Depreciation
8,553
17,105
25,658
34,211
42,764
= ADJUSTED COST BASIS
283,833
275,781
267,744
259,722
251,717
True CAPITAL GAIN
Sales Price
278,100
286,443
295,036
303,887
313,004
Non adjusted cost
292,386
292,887
293,402
293,933
294,480
True Gain or loss
-14,286
-6,444
1,634
9,954
18,524
CAPITAL GAIN for tax purposes
Sales Price
278,100
286,443
295,036
303,887
313,004
- Adjusted Cost Basis
283,833
275,781
267,744
259,722
251,717
CAPITAL GAIN (tax purposes)
-5,733
10,662
27,292
44,165
61,287
CAPITAL GAIN TAX
Capital Gain for tax purposes
-5,733
10,662
27,292
44,165
61,287
= Tax on Capital Gain
3,310
6,660
10,046
13,469
EST. NET SALE PROCEEDS (after tax)
Sales Price
278,100
286,443
295,036
303,887
313,004
- Sales Costs
16,686
17,187
17,702
18,233
18,780
- Ending Loan Balance
212,515
208,871
205,059
201,071
196,901
= Proceeds Before Taxes
48,899
60,386
72,275
84,583
97,323
- Capital Gain Tax
0
3,310
6,660
10,046
13,469
= EST NET SALE PROCEEDS A/T
48,899
57,076
65,616
74,537
83,853


74,537

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