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Lending Standards Dampen Existing-Home Sales

Sales of existing homes declined in April, largely the result of tighter lending standards and a drop in the number of subprime mortgage products available to consumers, according to the NATIONAL ASSOCIATION OF REALTORS®.

Total existing-home sales — including single-family, townhomes, condominiums and co-ops — fell 2.6 percent to a seasonally adjusted annual rate of 5.99 million units in April from an upwardly revised level of 6.15 million in March. Sales are 10.7 percent lower than the 6.71 million-unit pace in April 2006.

“We’ve been anticipating slower home sales because many subprime loan products are no longer available,” says NAR Senior Economist Lawrence Yun. “In addition, increased scrutiny by lenders is stopping risky mortgage origination, which is good for both consumers and the lending community. Fortunately, a wide availability of conventional mortgage products and the 4.5 million jobs created over the past 24 months will help to stabilize the market going forward.”

Interest Rate Outlook

NAR President Pat V. Combs says historically low mortgage interest rates continue to support the housing market. According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 6.18 percent in April, up from 6.16 percent in March; the rate was 6.51 percent in April 2006.

“Long-term financing remains favorable, but interest rates are rising,” says Combs. This week, Freddie Mac reported the fixed rate jumped to 6.37 percent. “Although some buyers have a wait-and-see attitude regarding home prices, they should consider that rising interest rates later this year could offset a lower sales price when you get down to the monthly payments.” But Combs notes all real estate is local so conditions can vary widely.

April Snapshot

The national median existing-home price for all housing types was $220,900 in April, down 0.8 percent from April 2006 when the median was $222,600. The median is a typical market price where half of the homes sold for more and half sold for less. However, there is a downward skew in the current national comparison because sales have shifted away from many high-cost areas during the last year, according to NAR.

Here are some other NAR findings:

• Single-family homes: sales declined 2.4 percent to a seasonally adjusted annual rate of 5.22 million in April from an upwardly revised 5.35 million in March.
  Median home price: $220,500 — 0.9 percent below a year ago
  April 2006 comparison: 5.88 million — an 11.2 percent drop from last year

• Existing condo and co-ops: sales fell 3.8 percent to a seasonally adjusted annual rate of 770,000 units in April from a level of 800,000 in March.
  Median existing condo price: $223,700 — up 1 percent from 2006
  March 2006 comparison: 834,000 — 7.7 percent lower than last year

• Housing inventory: rose 10.4 percent at the end of April to 4.20 million existing homes available for sale, which represents an 8.4-month supply at the current sales pace. That number is up from a 7.4-month supply in March.

• Midwest: sales eased by 0.7 percent in April to a level of 1.38 million; 11.5 percent below a year ago. Median price: $166,600 — 1.9 percent rise from April 2006

• South: sales slipped 1.2 percent to an annual sales rate of 2.38 million in April; 8.8 percent below April 2006. Median price: $181,100 — down 0.3 percent from a year ago

• West: sales declined 1.7 percent in April to an annual pace of 1.19 million; 15.6 percent below a year ago. Median price: $338,200 — 2.1 percent lower than April 2006

• Northeast: sales dropped 8.8 percent to a level of 1.04 million in April; 8.8 percent lower than April 2006. Median price: $283,600 — 0.6 percent below a year ago

www.REALTOR.org/realtormag

Reprinted from REALTOR® Magazine Online by permission of the NATIONAL ASSOCIATION OF REALTORS® .
Copyright 2003. All rights reserved.

Commercial Corner

By Frank Ramos

Investment Value and Performance

Cash-on-Cash

Cash on cash is another method to determine investment value or measure investment performance. It is calculated using the first-year cash flow before taxes as follows:

First-year cash flow before tax
---------------------------------- = Initial Investment
cash on cash (yield)

Once the initial investment has been calculated, the mortgage amount is added to the initial investment, resuling in investment value.

The investor's cash-on-cash requirement is derived from compatable propeties in the market and/or the investor's own investment objectives.

Some examples might make this easier to follow.

Determining Investment Value

An investor is considering buying a property that has a $500,000 mortgage. This property's first-year cash flow before taxes is forecasted to be $20,000. The buyer's cash-on-cash requirement is 10 percent. Using the cash-on-cash method, investment value is calculated as follows:

$20,000
----------- = $200,000
.10

$200,000 (initial investment) + $500,000 (loan amount) = $700,000

Measuring Investment Performance

Cash on cash also can be used to measure investment performance, assuming a given purchase price. The formula to calculate cash-on-cash is:

First-year cash flow before tax
---------------------------------- = Cash-on-cash yield
Initial Investment

Using the example above, if the asking price is $700,000 of which $500,000 can be financed, and first-year cash flow before tax is forecasted to be $20,000 what is the projected cash-on-cash return?

$20,000
------------ = 0.10 Cash-on-cash yield
$200,000

Pros and Cons of the Cash-on-Cash Method

Because the calculation is based on forecasted first-year cash flow before taxes, the cash-on-cash method takes into account vacancy and credit losses, operating expenses, and financing. The cash-on-cash ratio is limited in that it does not consider the tax impact, and it only looks at a one-year forecast when determining value or measuring performance.

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