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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