Situation Analysis of Housing Market - Assignment Example

Housing market Situation Analysis In the contemporary society, investment in the housing market has been proven to be highly regarded as quite profitable. One most imperative thing that must be used in getting to know the best option for a house to buy is through a thorough analysis of the various housing investments that are around. One must therefore look for variety of houses that are available and set forth a profound analysis in terms of the costs as compared to the benefits that accrue to the investment. As it stands now in the American market, the returns in the housing market are quite volatile (White, 2009). This calls for a profound analysis into the various analysis that would suffice for the real understanding on the risks involved in investing in a house and the value is going to benefit from the house if at all ne tries to endure such risks. Some of the pertinent issues that should be looked at when dealing in housing investments are the location; those apartments that are located near the cities and town tend to fetch high prices. This is because their rate of return as well is quite high (Drake, 2006). To this end, if one needs to buy a house that would be deemed t appreciate in value at a rapid rate, then one is supposed to consider the house that is near the city. Cost of buying the house one imperative factor that determines the kind f house one is supposed to be having. This coupled with the fact that most housing plans are quite expensive, the investor must now look for the sources of finances for which would be very convenient for him or her. In the quest for the finances again it is quiet imperative to note that the rate of return for the house in question should be higher than the cost of finance that has been imputed on it. In accordance with the Modigliani and Miller model, as long as the cost of finance is lower than the rate of return, the investment thereof will be deemed to accumulate wealth to the owner (Yellen, 2009). Given this reasoning, one should give the rate of return on the housing plan a great scrutiny. As one does the investment appraisal, one should also inculcate the advent of economic turbulent forces that occurs at various instances of the financial market. For example, the fall of mortgage value in the year 2008 in the US financial market brought much pain to these individual., the subprime borrowing that was started in the years 1999 in order to create some financial flow of the assets in anticipation that that the subprime areas in the US will soon be prime hit the wall when the consumer debts grew exponentially (Ornstein, 2015). Given this gist of reasoning, most of the mortgages that were selling highly suddenly lost their value forth the fact the fact that the mortgage market was quite flooded with unprecedented growth of the consumer debt. In the case of peter who wants to buy a house, there are various investment analysis that needs to be carried out in order to know the best housing plane that peter can take that would ,most convenient for him. The most appropriate data that is collected are the location for the houses which are legible. Again the cost of each house should be inculcated for analysis. The capitalization rate for each investment property, the appropriated income for the housing plan brought forward and lastly the expected operating expenses for the housing plan given forth are of essence here (Smith, 2015). All these elements are to be inculcated in the provision of various investment appraisal techniques that are deemed sufficient in bring out the best housing plan that peter is to invest in. in general, the big question at hand is to get to know the most appropriate housing plan that is most appropriate for peter to invest in. Compilation of Research, Data, or Other Pertinent Information Fig.1.0 the raw data on five best selling houses across the United States. No Name of investment property Location Capitalization rate Current market price ($) Net operating income ($) Operating expenses ($) A 213 Seventh Avenue New York 4% 7.2 million 288,000 41,908 B 201 Saratoga Street California 7% 1,187,650 83,135 29,910 C 3016 Marina Bay Dr, League City 6.75% 8,361,000 564,375 265,987 D 582 Park Ave, Albany, NY 12208 8% 825,000 66,294 37,106 E Forest Hills Park Apartments Superior Road, East Cleveland 10.46% 3,750,000 392,234 828,958 Source: LOOPNET Company statistics @2015 Since peter needs to stay around California, the best investment in terms of location is investment B which is situated in California. Problem Solving Related to choice of housing plan From the data collected there are calculations that have been done in order to come up with the best housing investment for peter. This entails the use of capital budgeting technique, the use descriptive statistics of these capitalization rates brought forward, among others. The capital budgeting technique used here is the use of the net present value (Keen, 2009). Additionally, there is the financial ratio analysis that has been given to these housing investment plans. The analysis of these data is as tabled below. THE DESCRIPTIVE STATISTICS OF CAPITALIZATION RATES       Mean 0.07242 Standard Error 0.010426236 Median 0.07 Mode #N/A Standard Deviation 0.023313773 Sample Variance 0.000543532 Kurtosis 1.228208473 Scenes -0.014761168 Range 0.0646 Minimum 0.04 Maximum 0.1046 Sum 0.3621 Count 5 Largest(1) 0.1046 Smallest(1) 0.04 Confidence Level (95.0%) 0.028947872 The Discussion Looking at the summary output above, it is evident that the risks involved in investing in all the housing plan is less. This fact has been strengthened by the standard deviation of 0.023313773 which is quite less than 1. The average capitalization rate is around 7% which reasonable enough since they are higher as compared to the mortgage rates that from the short term and the long term graphs given above (Crum, & Derkinderen, 1981). The mortgage rate according to the graphs ranges from, 2% to 4%. Peter should now not worry a lot since all these investments have been proven to have some general sense of return. Financial ratio analysis Investment number Current market price Net operating income Operating expenses A 7,200,000 288000 41908 B 1187650 83135 29910 C 8361000 564375 265987 D 825000 66294 37106 E 3750000 392234 828958 Table 1.2 Capitalization rate gross profit Gross profit margin 4.00% 329908 4.58% 7.00% 113045 9.52% 6.75% 830362 9.93% 8.00% 103400 12.53% 10.46% 1221192 32.57% Table 1.3 Expense capital ratio Operating income after tax (40%) return on investment 0.58% 172800.00 2.40% 2.52% 49881.00 4.20% 3.18% 338625.00 4.05% 4.50% 39776.40 4.82% 22.11% 235340.40 6.28% Table 1.4   current market price Operating income after tax Equity financing Return on equity A 7,200,000 288000 4320000 6.67% B 1187650 83135 712590 11.67% C 8361000 564375 5016600 11.25% D 825000 66294 495000 13.39% E 3750000 392234 2250000 17.43% From the calculations above, it is evident that investment E has a highest gain than the rest. This is brought out clearly by the highest profit margin that peter would get when he buys the house. The high wealth accumulation stance is brought boosted by the second investment which is investment D (CFM, 2015). these two investments are, according to the financial ratio analysis, the best investment plans that peter can buy. Capital budgeting technique: net present value, internal rate of return and marginal internal rate of return. Fig. 3.1   INVESTMENT A       Year cash inflows cash outflow net cash flows   1 $ 288,000.00 $ 7,200,000.00 $ (6,912,000.00)   2 $ 288,000.00 $ - $ 288,000.00   3 $ 288,000.00 $ - $ 288,000.00   4 $ 288,000.00 $ - $ 288,000.00   5 $ 288,000.00 $ - $ 288,000.00   6 $ 288,000.00 $ - $ 288,000.00   7 $ 288,000.00 $ - $ 288,000.00   8 $ 288,000.00 $ - $ 288,000.00   9 $ 288,000.00 $ - $ 288,000.00   10 $ 288,000.00 $ - $ 288,000.00   11 $ 288,000.00 $ - $ 288,000.00   12 $ 288,000.00 $ - $ 288,000.00   13 $ 288,000.00 $ - $ 288,000.00   14 $ 288,000.00 $ - $ 288,000.00   15 $ 288,000.00 $ - $ 288,000.00   16 $ 288,000.00 $ - $ 288,000.00   17 $ 288,000.00 $ - $ 288,000.00   18 $ 288,000.00 $ - $ 288,000.00   19 $ 288,000.00 $ - $ 288,000.00   20 $ 288,000.00 $ - $ 288,000.00                         NPV ($529,846.15)       IRR -7%       MIRR -10%     Fig. 3.2   INVESTMENT B     cash inflows cash outflow net cash flows Year $ 83,135.00 $ 1,187,650.00 $ (1,104,515.00) 1 $ 83,135.00 $ - $ 83,135.00 2 $ 83,135.00 $ - $ 83,135.00 3 $ 83,135.00 $ - $ 83,135.00 4 $ 83,135.00 $ - $ 83,135.00 5 $ 83,135.00 $ - $ 83,135.00 6 $ 83,135.00 $ - $ 83,135.00 7 $ 83,135.00 $ - $ 83,135.00 8 $ 83,135.00 $ - $ 83,135.00 9 $ 83,135.00 $ - $ 83,135.00 10 $ 83,135.00 $ - $ 83,135.00 11 $ 83,135.00 $ - $ 83,135.00 12 $ 83,135.00 $ - $ 83,135.00 13 $ 83,135.00 $ - $ 83,135.00 14 $ 83,135.00 $ - $ 83,135.00 15 $ 83,135.00 $ - $ 83,135.00 16 $ 83,135.00 $ - $ 83,135.00 17 $ 83,135.00 $ - $ 83,135.00 18 $ 83,135.00 $ - $ 83,135.00 19 $ 83,135.00 $ - $ 83,135.00 20                 NPV ($68,685.79)     IRR 4%     MIRR 9%     Fig. 3.3   INVESTMENT C     cash inflows cash outflow net cash flows Year $ 564,375.00 $ 8,361,000.00 $ (7,796,625.00) 1 $ 564,375.00 $ - $ 564,375.00 2 $ 564,375.00 $ - $ 564,375.00 3 $ 564,375.00 $ - $ 564,375.00 4 $ 564,375.00 $ - $ 564,375.00 5 $ 564,375.00 $ - $ 564,375.00 6 $ 564,375.00 $ - $ 564,375.00 7 $ 564,375.00 $ - $ 564,375.00 8 $ 564,375.00 $ - $ 564,375.00 9 $ 564,375.00 $ - $ 564,375.00 10 $ 564,375.00 $ - $ 564,375.00 11 $ 564,375.00 $ - $ 564,375.00 12 $ 564,375.00 $ - $ 564,375.00 13 $ 564,375.00 $ - $ 564,375.00 14 $ 564,375.00 $ - $ 564,375.00 15 $ 564,375.00 $ - $ 564,375.00 16 $ 564,375.00 $ - $ 564,375.00 17 $ 564,375.00 $ - $ 564,375.00  18 $ 564,375.00 $ - $ 564,375.00 19 $ 564,375.00 $ - $ 564,375.00 20       NPV ($596,122.60)     IRR 3%     MIRR 8%     Fig. 3.4   INVESTMENT D     cash inflows cash outflow net cash flows Year $ 66,294.00 $ 825,000.00 $ (758,706.00) 1 $ 66,294.00 $ - $ 66,294.00 2 $ 66,294.00 $ - $ 66,294.00 3 $ 66,294.00 $ - $ 66,294.00 4 $ 66,294.00 $ - $ 66,294.00 5 $ 66,294.00 $ - $ 66,294.00 6 $ 66,294.00 $ - $ 66,294.00 7 $ 66,294.00 $ - $ 66,294.00 8 $ 66,294.00 $ - $ 66,294.00 9 $ 66,294.00 $ - $ 66,294.00 10 $ 66,294.00 $ - $ 66,294.00 11 $ 66,294.00 $ - $ 66,294.00 12 $ 66,294.00 $ - $ 66,294.00 13 $ 66,294.00 $ - $ 66,294.00 14 $ 66,294.00 $ - $ 66,294.00 15 $ 66,294.00 $ - $ 66,294.00 16 $ 66,294.00 $ - $ 66,294.00 17 $ 66,294.00 $ - $ 66,294.00 18 $ 66,294.00 $ - $ 66,294.00 19 $ 66,294.00 $ - $ 66,294.00 20         NPV ($57,937.04)     IRR 6%     MIRR 9%     Fig. 3.5   INVESTMENT E cash inflows cash outflow net cash flows Year $ 392,234.00 $ 3,750,000.00 $ (3,357,766.00) 1 $ 392,234.00 $ - $ 392,234.00 2 $ 392,234.00 $ - $ 392,234.00 3 $ 392,234.00 $ - $ 392,234.00 4 $ 392,234.00 $ - $ 392,234.00 5 $ 392,234.00 $ - $ 392,234.00 6 $ 392,234.00 $ - $ 392,234.00 7 $ 392,234.00 $ - $ 392,234.00 8 $ 392,234.00 $ - $ 392,234.00 9 $ 392,234.00 $ - $ 392,234.00 10 $ 392,234.00 $ - $ 392,234.00 11 $ 392,234.00 $ - $ 392,234.00 12 $ 392,234.00 $ - $ 392,234.00 13 $ 392,234.00 $ - $ 392,234.00 14 $ 392,234.00 $ - $ 392,234.00 15 $ 392,234.00 $ - $ 392,234.00 16 $ 392,234.00 $ - $ 392,234.00 17 $ 392,234.00 $ - $ 392,234.00 18 $ 392,234.00 $ - $ 392,234.00 19 $ 392,234.00 $ - $ 392,234.00 20         NPV ($255,775.37)     IRR 10%     MIRR 11%     The calculations done for the capital budgeting techniques assumes the following: The period of investment is 20 years for all the housing plans. There is constant cash flow from the investment thereof due to its appreciation of its value as time goes by. The cost of capital used t discount the cash flows in NPV is the capitalization rate of each housing plan. Conclusion and recommendation From the analysis brought forward above, it is evident that peter is should invest housing plan E which the Forest Hills Park Apartments, located in Superior Road, East Cleveland. This is because the apartment has high capital gain than the rest at the same time it is located in the area which is around the city (urban area) which makes it to be more profitable. Again the apartment’s rate of return is around 10% which is far much higher than the cost of mortgage which is 4.25% maximum (Baker, 2008). With the good financial background that peter has, he should look acquire a mortgage of the property so that he could be at a position to finance the property with the salary and putting the $ 100,000 as the deposit required. I this research, a further analysis on the taste and preferences of peter am left out and hence this leaves room for further analysis. Again it should be noted the rules and regulations dynamics on the buying and selling of mortgage should be given keen scrutiny. References Baker, D. (2008). The housing bubble and the financial crisis. Real-world economics review, 46, 73-81. CFM, C. F. M. (2015). AIG, 71 All direct investment in that country (ACDIA), 211–13, 226–28 alt-A MBS, 54, 56 American Securitization Forum’s Loan. Measuring Wealth and Financial Intermediation and Their Links to the Real Economy, 73, 383. Crum, R. L., & Derkinderen, F. G. (Eds.). (1981). Capital budgeting under conditions of uncertainty. Nijhoff. Drake, P. P. Capital budgeting techniques. Online (datum poslední revize: 29.6. 2006): www. fau. edu/~ ppeter/fin3403/module6/capbudtech. pdf. Keen, S. (2009). Mad, bad, and dangerous to know. real-world economics review, 49, 2-7. Kim, J. S., & Ryu, D. (2015). Effect of the subprime mortgage crisis on a leading emerging market. Investment Analysts Journal, 44(1), 20-42. Ornstein, S. (2015). The Non-Qualified-Mortgage Conundrum. The Journal of Structured Finance, 20(4), 58-61. Smith, J. L., Keith, R. M., & Stephens, W. L. (1988). Managerial accounting. New York: McGraw-Hill. Smith, S. J. (2015). Safe as Houses?: The Uneven Integration of Housing, Mortgage, and Financial Markets. OUP Catalogue. White, L. H. (2009). Housing Finance and the 2008 Financial Crisis. The Cato Institute, August. Yellen, J. (2009). The mortgage meltdown, financial markets, and the economy. The BE Journal of Economic Analysis & Policy, 9(3). Read More