Mesquite Market

Cash flow analysis is a tool used by all real estate investors. It is a relatively simple formula, income compared to expenses basically. When looking at income, estimated vacancy rates are always deducted from the gross income estimate. 

Since vacancy rates have gone way up in Mesquite, the reasoning behind considering vacancy rates is becoming very clear to many speculators. 

As owners pull property off the market, and many are because they can’t or won’t lower the asking price, the supply in the rental market is increasing. Which brings us back to that darn supply and demand principle, as supply goes up and demand remains relatively stable, prices must come down. 

However, many of the current owners are stubbornly saying “yeah right, I don’t think so.” Of course it’s their property and they are in charge. 

Here is a common scenario; purchased in 2005 for $150,000 for speculation, placed back on the market at $269,900. After six or eight months of lowering the asking price it’s now down to $199,900, and still vacant. The sold comparables are coming in closer to $175,000.
 
In the mean time 6.5% interest cost, which is unavoidable regardless of the type of loan you have, it’s the cost of money, that’s around $820 per month, property taxes run around $125 per month, then there are HOA dues of $150, that’s around $1100 per month holding cost or $13,200 a year. 

Cost of sale is going to average around 7 to 8%. So the $199,900 at 92% is $183,900 minus one year holding cost of $13,200 equals $170,700. But it’s not selling at this price. 

The question is do we drop the price to $179,900, closer to what is actually selling, and try to break even. 

Or hold it and hope it will go up and try to rent it, faced with wear and tear, negative cash flow and vacancy rates. What if the market goes down further, if so when will it come back? 

Any lower price or longer wait and its going to be a real loss, cash out of pocket loss. For some the market has already passed this point.
 
So waiting is an option but it is not free. 

Typically holding costs over an extended period are the unexpected enemy which wrecks the deal and are always a symptom of a slowing market.

If you are a regular reader of Mesquite Market.com then today’s existing homes report isn’t a surprise. We have been reporting for some time now that it is not just sales numbers that are down, so are selling prices. 

Inventory of property “For Sale” continues to grow and asking prices are holding firm. Builders locally appear to be gearing up for what they expect to be a busy winter, with new homes popping up all over town. 

At the same time fixed rate mortgages remain historically low. For some who have taken out adjustable rate mortgages over the past few years payments are beginning to go up along with the fed rate increases. 

Vacancy rates for rental property continue to climb as more speculators dump homes that aren’t selling into the rental market. 

Local real estate prognosticators run the gamut on predictions from “train wreck” to “give it thirty days and we will be back to the good ole days”. 

For this thirty year real estate veteran, all the reports I am reading and trends I see look pretty scary to me. Words like housing glut, unaffordable, denial, greed, trapped owners, difficult adjustment, and unique, all come to mind. 

The third quarter ends this week and I will be working on the Mesquite Market Quarterly, watch for it mid October.

People need cars and they like to drive new cars, better mileage and safety features, plus it’s new. So what if auto makers raised there prices 30% a year effectively doubling the cost of a car over three or four years. At the same time they offered 0% financing or even let you borrow more than you needed to buy the car (rebates, cash back in your pocket). How many years would it take for sales to slow down and eventually come to a complete stop. When would people quit buying them? What if they threw in incentive packages, like new living room furniture and a TV with your car? 

What about gas for those cars, $3 a gallon seems expensive. But what if it was going up at 30% a year, again doubling every three years? Would people drive less if gas cost $9 a gallon? What about milk, would we drink as much $8 a gallon milk?

Who would we blame for $8 a gallon milk, the cows? No there would be public outcry about the farmers, the oil producers, and the auto makers. There would be finger pointing and name calling, investigations into gouging, and distain for the greedy profiteers. Milk drinkers across the country would boycott the products in protest. Sales of less expensive forms of alternative transportation would skyrocket. 

Blame for the increases would be placed on the people responsible for the higher prices. The ones setting those prices. 

So why has the real estate market come to an almost dead stop? Could it be the prices? Is it fair to say sellers actually are responsible for higher prices, and the slowing market?

Buyers seem to be saying so!  The real question is will they (the buyers) turn it into a revolt, a complete boycott. Has it already started?

Next time you hear from a seller complaining about the slow market, ask them about the price. My guess is they won’t accept any responsibility for the slower market.

Foot note: In case you think the slowing market is because of interest rates. 30 year fixed rate mortgages have only increased  from 6.30% in June of 2004 to 6.44% today. June of 2004 of course is when the fed started raising rates.                                                                                                                                                  

Maybe it is seller optimism, maybe it is broker fear of not getting the listing (you know, take the listing at any price, just get the listing), and maybe it is pure greed and ignorance. Maybe you could blame it on last year’s market, since some sellers need that much to get out with their skin. What ever it is, it is happening. As the market slows and actual selling prices trend down, asking prices are increasing! 

There is lots of talk about inventory, how many more homes are for sale today. In Mesquite today you can pick from over 400 properties. Sales numbers year to date are off about 25%. 

The average asking price for a single family home is up to $204 per square foot, with an average asking price of $428,481. 

I showed homes to a buyer from Idaho yesterday, as we walked out of one home he turned to me and said “nice house, why are they asking twice what is worth?” 

Bubble- Chewing gum comes to mind. 

Bursting Bubble- Hindenburg. 

Housing Bubble- A large blow up building enjoyed at children’s birthday parties.

Soft Landing- A good pad for bouldering. (As in rock climbing)

Normalizing- Not sure, rhymes with caramelizing? May be a food term.

Flipper- “The Bird” or the name of a Dolphin. 

Speculator- Can you get a degree in the field of gambling? 

Investor- Endangered species who actually considers cash flow important.

Exotic Financing- May have something to do with paying for the Belly dancers. 

Negative am- Don’t get too close, this thing bites. 

Equity- Newest form of no effort cash crop, grows back overnight. 

Stated Income, No Doc- Something offered to people in jail. 

Option Arm- Has 360 degree rotation at the elbow 

On second thought, let’s wait to rewrite the glossary.

Give the market twelve months; many of these may be extinct. The consequences will linger for many well in the future but the beasts themselves will mostly be gone.