Real Estate Investment: Return on Investment and Cash Flow Calculation

September 17, 2009

La Jolla, CA.—-Bay Area home sales bucked the seasonal norm and fell last month from July, though they remained higher than a year ago for the 12th consecutive month. The region’s overall median sale price also declined as a greater portion of sales occurred in more affordable areas, a real estate information service reported.

A total of 7,518 new and resale houses and condos closed escrow in the nine-county Bay Area last month. That was down 14.3 percent from 8,771 in July and up 4.0 percent from 7,232 in August 2008, according to MDA DataQuick of San Diego.

Last month’s sales were 24 percent below the average number of sales, 9,886, for the month of August since 1988, when DataQuick’s stats begin. August sales have ranged from a low of 6,688 in 1992 to a high of 13,940 in 2004.

A thinner inventory of distressed properties for sale, hence fewer “bargains,” helps explain the relatively sharp drop in sales between July and August. The number of foreclosed properties that resold in August fell 15.2 percent from July.

Moreover, July was a relatively strong month for escrow closings – the strongest for any month since August 2006. July closings mainly reflect purchase decisions made in early summer, whereas August closings reflect home shoppers’ ability and willingness to buy in the middle of summer.

“Part of the mid-summer pause in the market could have been caused by home shoppers becoming frustrated by market conditions they didn’t anticipate. In many areas there were fewer homes, especially cheap foreclosures, to choose from, and lots of talk about multiple offers and all-cash deals. It might have driven some back to the sidelines,” said John Walsh, MDA DataQuick president.

“At the same time, people are still concerned about job security, and about how many foreclosures might yet hit the market,” he said. “There are ongoing reports of mortgage delinquencies rising, yet the number of homes being foreclosed on has trended down lately. It’s bred a lot of uncertainty among the pundits and the public about how many more foreclosures are coming, when they’ll hit, and what impact they’ll have on prices.”

The 14.3 percent drop in sales between July and August was atypical, given the average change between those two months is a gain of 3.4 percent. However, sales also fell between July and August in the past two years and in seven other years back to 1988. Two of those years saw July-August dips greater than this year’s: a drop of 15.2 percent in 1992 and 14.8 percent in 1998.

The median price paid for all new and resale houses and condos last month fell to $360,000, down 8.9 percent from $395,000 in July and down 19.5 percent from $447,000 in August 2008.

Despite the August median’s plunge from July, it was the second-highest for any month since last October, when it was $375,000. August’s median was 24.1 percent higher than the current cycle’s low of $290,000 in March this year, but it was 45.9 percent below the July 2007 peak median of $665,000.

The median’s $35,000 drop between July and August was mainly the result of a shift toward a higher percentage of sales occurring in lower-cost inland areas. Although sales fell across the region and home price spectrum, some costlier areas saw the biggest declines. Sales fell the most – 21.1 percent – between July and August in Santa Clara County. Its share of total Bay Area sales fell to 23.1 percent in August, down from 25.1 percent in July.

Across the Bay Area, home sales above $500,000 represented 34 percent of all sales in August, down from 36.2 percent in July and down from 44.7 percent in August 2008. Sales of homes above $800,000 fell to 12.2 percent of sales in August, down from 14.1 percent in July and 18.9 percent a year earlier.

There was a corresponding decline in the mortgages used to purchase high-end homes. Loans above $417,000 – formerly defined as “jumbo” loans – accounted for 27.8 percent of all Bay Area purchase loans last month. That was down from 30.2 percent in July and 31.9 percent a year earlier. Before the August 2007 credit crunch, loans over $417,000 were used to finance more than 60 percent of Bay Area sales.

Another fuel source for high-end sales – adjustable-rate mortgages (“ARMs”) – continues to be used far less than what’s been normal historically. In August, 6.6 percent of all purchase loans were ARMs, the same as in July and down from 20.8 percent a year earlier. ARMs fell to a record low of 3.0 percent in January this year. ARMs had averaged 61 percent of Bay Area purchase loans this decade up until when the credit crunch hit two years ago.

Foreclosure resales made up 32.5 percent of total August resales, up from 31.2 percent in July but down from 36.0 percent a year ago. The August percentage was higher than July’s, despite fewer foreclosed homes selling last month, because of the sharp drop in non-foreclosure resales in August.

San Diego-based MDA DataQuick is a division of MDA Lending Solutions, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. MDA DataQuick monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.

The typical monthly mortgage payment that Bay Area buyers committed themselves to paying was $1,585 last month, down from $1,739 the previous month, and down from $2,256 a year ago. Adjusted for inflation, current payments are 39.7 percent below typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 55.4 percent below the current cycle’s peak in July 2007.

Indicators of market distress continue to move in different directions. Foreclosures are off their recent peak but remain high historically, while financing with adjustable-rate mortgages has edged higher but remains low, as does financing with multiple mortgages. Down payment sizes are stable and non-owner occupied buying is above-average in some markets, MDA DataQuick reported.  

Source: MDA DataQuick Information Systems, www.DQNews.com

Media calls: Andrew LePage (916) 456-7157 or John Karevoll (909) 867-9534

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