15 Cities Have Deteriorated for Sellers Over the Last Month
The table is once again reporting a swing in favor of buyers. We have 15 cities that have deteriorated for sellers over the last month, with Mesa and Gilbert joining the 13 we saw last week. We only have two cities that have improved over the past month, Goodyear and Cave Creek, both by small percentages. The average change in Cromford Market Index* over the past month is -7.5%, while last week we saw -8.0%. There is a tiny sliver of good news that the decline is no longer accelerating.
The fastest decliners are Fountain Hills, down 15%, and Maricopa, Glendale, and Paradise Valley, down 12%. Peoria is down 10%, and Chandler, Mesa, and Tempe are down 9%.
Seven cities are still seller's markets, five are balanced, and five are buyer's markets.
Now that the spring selling season is properly underway, more listings are going under contract. The supply of active listings without a contract has grown, but only by over 2% during the past week. This is slower than last month when we saw an increase of 3.2%. The contrast ratio has clawed its way back to 37, which is low but not terrible.
This time last year, it stood at 52 mainly because we had far less supply.
Although CMIs are still headed lower in most places, the slight improvement in demand is starting to slow that trend.
Among the secondary cities, El Mirage, Apache Junction, Anthem, and Tolleson are seller's markets, and Laveen is balanced. At the same time, Litchfield Park, Sun City, Sun City West, Arizona City, Gold Canyon, Casa Grande, and Sun Lakes are buyer's markets.
More listings are under contract now that the spring selling season is properly underway. The supply of active listings without a contract is growing, but only by over 2% during the past week. This is slower than last month when we saw an increase of 3.2%. The contract ratio has clawed its way back to 37, which is low but not terrible. This time last year, it stood at 52 mainly because we had far less supply.
Although CMIs are still headed lower in most places, the slight improvement in demand is starting to slow that trend.
Casa Grande is in a robust buyer's market with a CMI of only 46.3.
Price changes are very much in vogue. They recently peaked at 3,820 per week, 52% higher than this time last year. This is not surprising, as we have 40% more listings now. Price cuts outnumber price increases by about 14 to 1.
*Cromford Market Index™ is a value that provides a short-term forecast for the balance of the market. It is derived from the past four years pending, active, and sold listings trends compared with historical data. Values below 100 indicate a buyer's market, while values above 100 indicate a seller's market. A value of 100 indicates a balanced market.
DSCR Loans: A Guide for Real Estate Investors
As a real estate investor, whether just starting or experienced, you may explore various financing options to kickstart or expand your property investment journey. One financing option that you might come across is the Debt Service Coverage Ratio (DSCR) loan. DSCR loans are specifically designed for income-generating properties, and understanding them can be vital to making informed financial decisions as a real estate investor. This article will explain DSCR loans and how they can benefit you.
What is a DSCR Loan?
The Debt Service Coverage Ratio (DSCR) is a financial metric lenders use to assess the risk of providing loans for income-generating properties. DSCR loans evaluate the property's ability to generate sufficient income to cover its operating expenses and debt service obligations. In other words, it analyzes whether the property's income is enough to pay the mortgage payments and other related costs.
How is the DSCR Calculated?
To calculate the DSCR, you need two main figures: the property's proposed or existing rent and total debt service.
Rent:
• Proposed (or Market) Rent: If you’re considering buying a property that isn’t currently income-producing and converting it into a rental, we order a Rent Schedule with the appraisal. The appraiser pulls the rents of nearby comparable homes, and we use that information to determine what the house would rent for in the current market.
• Existing Rent – if the home is currently rented out with a lease agreement, we can use that with documented proof of receipt.
Lease agreements are referred to as long-term rents (LTR). However, with the rising popularity of VRBO and AirBnB, DSCR loans also allow for short-term rents (STR). The easiest and preferred way to document this is to gather the rental data and documentation from the seller for the last 12 months.
Debt Service:
Total Debt Service: Total Debt Service refers to the total debt payments required, including the mortgage payment and any other obligations on the property(most commonly, this would be the HOA dues).
Once you have your Rents and Total Debt Service figures, you can calculate the DSCR using the following formula:
DSCR = Net Rent / Total Debt Service
Typically, lenders prefer a DSCR of 1.25 or higher. This means the property's income is 1.25 times greater than the debt service obligations, providing a comfortable margin for covering expenses and loan payments. It should be noted that ratios less than 1.25 are allowed.
Why are DSCR Loans Attractive to Real Estate Investors?
DSCR loans offer several benefits that make them attractive to real estate investors:
1. Focus on Property Income: Unlike traditional residential mortgages that heavily consider the borrower's personal income and credit history, DSCR loans primarily focus on the income-generating potential of the property. This allows investors to qualify for financing based on the property's performance rather than their financial standing. This is particularly beneficial for self-employed borrowers who may have trouble qualifying based on tax returns.
2. Enhanced Cash Flow: DSCR loans ensure the property generates sufficient income to cover expenses and loan payments. This can lead to positive cash flow, where the rental income exceeds the expenses, providing investors with extra funds for property improvements or future investments.
3. Portfolio Growth: DSCR loans can facilitate easier access to financing, allowing first-time investors to acquire multiple income-generating properties and expand their real estate portfolio.
4. Lower Personal Liability: DSCR loans are often non-recourse, meaning that in the event of default, the lender's recourse is limited to the property itself, not the borrower's assets. This reduces the investor's liability, providing an added layer of protection.
Challenges to Consider:
While DSCR loans offer valuable benefits, real estate investors should also be aware of potential challenges:
1. Stringent Qualification Criteria: DSCR loans require substantial property income and may have stricter qualifications than conventional residential mortgages. One primary example is the down payment. DSCR loans typically need at least 20% to 25% down.
2. Limited Options for Non-Income Properties: DSCR loans are best suited for income-generating properties, making them less applicable for fix-and-flip or non-income properties.
Conclusion:
DSCR loans present an attractive financing option for first-time or experienced real estate investors looking into income-generating properties. DSCR loans offer enhanced cash flow and portfolio growth opportunities by focusing on the property's income-generating potential. However, knowing the stringent qualification criteria and limitations for non-income properties is essential. As you explore financing options for your real estate investment, understanding DSCR loans can be valuable in making informed decisions that align with your investment goals and financial capabilities. Please don’t hesitate to reach out if you would like to see how we can use this loan option to build your real estate portfolio.
Housing Market
The NAHB reports a sharp decline in builder sentiment in February due to concerns over tariffs, elevated mortgage rates, and high housing costs.
Winter storms slowed single-family homebuilding in January. A limited rebound is expected amid tariffs and elevated mortgage rates.
Mortgage demand dipped last week. Applications fell 6.6% as affordability continued to sideline potential buyers.
Economy
The minutes from last month's Fed meeting showed that officials wanted to maintain policy rates despite stubborn inflation and economic uncertainty.
Mortgage rates have held steady to begin the year as inflation fears and concerns over a surge in debt issuance have failed to materialize.
New jobless claims increased moderately last week, suggesting the labor market remains solid.
Weather
Have a great week!
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