Continuing plunge in rental inventory.

2014-03-01_0042

 

 

This one year chart of Rental absorption rate tells the story. Investors have largely quit buying homes to rent, and inventory has now dropped below the market stable 2.x months inventory. The rate of the drop has actually accelerated. Another month at this rate, and we will start to experience a serious shortage in rentals, which will lead to prices increasing, possibly swiftly. This can only end one of two ways: Less people rent homes, which seems a bit unlikely, or more homes are offered for rent. The latter is a possibility, but I view price increases as the most probable short term, and year long outlook.

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continued observation on Phoenix market

1. RENTALS DISAPPEARING!!  The trend I noticed in the past two posts has continued unabated, and if it continues, will soon have a dramatic effect on the Phoenix housing market. 

Yesterday, we dropped under 6000 active rentals on the mls. This down some 20% since this time last year, and for comparison, we had 9500 homes for rent in October. Total leases signed in the past 30 days is 4000, an increase of 10% over the same period last year. 

Demand up, supply down, and prices will rise. Already, well prices rentals are going quickly off the market, if active listings continues to drop, we will see serious rental increase. 

The irony, is that so many potential buyers in the past year, dismayed by how phoenix prices have bounced off of the crashes, floor, decided to rent. “Why buy, if you can rent for about the same price?” Well, how does that logic work, if you see your rent start to go up at the end of your lease? Phoenix rental rates are actually quite low, and have not seriously increased in nearly 15 years, so they could go up by some very real percentages, and still it wouldn’t really cause a surge in construction. But, it will be push to housing prices, slowly over time, likely somewhat offsetting the slowdown our recent interest rate hikes have caused.

 

On the sales price front, the “lull” or plateau I predicted in August of last year is still in effect. Price increases have been slim to none since then, and inventory has indeed increased, while buying has slowed. The mirror opposite of what we are seeing on the rental side. However, it has not been too dramatic to cause me to predict any real market price drops. We have 26,000 homes for sale, and sales are around 5000 in the rolling 30 day window. So, 5.x months inventory. Sales inevitably pick up in the late spring and summer, so I don’t see this inventory level hurting the market, unless it increase dramatically. If we cross into the 30K inventory range, and stay there past August, prices could possibly come down, if inventory drops, prices will increase. We are at the balance point more or less today, so it will take more data and time to see which way things go. 

 

Those who know me for years, Know I was one of the first to predict the crash, and I saw the bounce back coming. (I sold 4 of my homes before the crash, and then bought 13 across the bottom) Don’t take my predictions on our rental market lightly! I don’t have a crystal ball, but my data analysis has not steered me wrong yet!

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Rentals dropping? start of a big change to Phoenix market?

Last month, I observed that listed rentals dropped from 8400 to 7900 in december, approximately. This was a bit of a surprise to me, as   as a landlord, I have always found December to be one of the hardest months to rent a home. So, I was curious to see what would happen in January, would rentals become more numerous?

Well, today is the midpoint of January, and we have 7350 available. Now, I have to confess, there are several factors that make it hard for me to analyze the rental market from mls data:

1. I didn’t keep track of this data historically, so I don’t have old patterns to compare to.

2.  I don’t know how much seasonality it has (after all, Phoenix is famous for winter snow-bird renters)

3. Historically, the MLS wasn’t used much for rentals. Many years ago, everybody used the newspaper. A few years ago, it was craigslist, until that got over run with spam. In the past couple of years, as lots of investors bought homes, often times as large companies, they placed them with real estate agents; The number of real estate rentals listed on the MLS had been going up quite strongly over the past few years.

So, given all that, I don’t know exactly how to interpret the data, but I will say this: If this trend continues, we may see a serious tightening and hence price increases in the Phoenix rental market going forward, ad precisely the same time that purchase prices seem to have stagnated. I think many people’s analysis is that “renting is about the same price as buying  today”, but if we see rental prices go up 10% say over the next 3 or 4 years, that changes the buy to rent decision dramatically!

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Two trends to watch, Phoenix real estate market

Listing inventory, peaked a couple months ago, and has dropped by roughly 500 since then… The end of the year is never normal, and so the question is: do we get a flood of new listings in the spring? Do we get the traditional spring increase of normal buyers? Today the market is much closer to balanced than it has been in a decade, how these two factors change determine what will happen to prices next year. Foreclosures and short sales are all but disappearing from our market, and investor buying has dropped by half in the past year, so it is down to normal buyers and sellers to set the future trends in action.. An even more interesting trend is showing up on the for rent side..properties actively for rent have dropped steeply in just the past couple months. Typically, December is a tough month to rent a property, but this December, we dropped from 8400 active rentals to 7920. Rentals are cyclical, with more coming on in the early days of the month, as tenants typically move out on the last day of the month, and after a week or so to prep the house, it becomes listed. But this is an unprecedented monthly drop, and even more surprising to see it in December. I will update this trend as I re check the data in mid January.

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The market has slowed. Will it crash again? stay slow? begin to increase again?

MARKET LULL UPDATE:

Three months later, the data have changed enough that it is time to update this analysis. My responses will be specific to Phoenix, since I have access to all of Phoenix data, if you have real data from another market, feel free to share it.

Supply: as predicted, supply has increased. Today, Phoenix metro stands at 23,700 units for sale. This is up roughly 25% from a year ago, and has been climbing swiflty. Bank owned + HUD have held steady at roughly 1000 units, Short sales after plunging to near zero, are back to 1100.

Demand: 6000 sold in the past 30 days, a drop of 15% from a year ago.

Combined, this is a huge change. From roughly 2 months supply, we are now approaching 4 months, an amount likely to keep price increased muted for now. Fall-winter is always slower, and we had the government shut down last month, so it will remain to be seen if supply continues to grow into spring or not.

Positive factors:
Pending foreclosures dropped another 460 in October. We are now at historical norms and on our way to lower than historical norms of pending foreclosures. Clearly, this source of distressed inventory is going to disappear, and that will serve to somewhat mitigate the changing supply/demand metric. (4 months supply/demand ratio is very different if half of them are bank owned and they keep flowing into inventory, then when it is mostly occupied homes that folks can afford to wait to sell)

Foreclosure Filings
Foreclosure Filings: Arizona > Maricopa County
Foreclosure Inventories
Foreclosure Inventories: Arizona > Maricopa County

I count 1285 Notice of trustee sales for October, 830 cancelled sales, and 895 trust deeds (either back to bank or to third party)

Pending short sales have plummeted to 2700 from 10,000 at this time last year. Banks simply put, are not giving away short sales any more, and price wise, this is also a positive for the market.

Given all the data, in totallity, we have two competeing trends:
1. Increasing supply/demand.
2. the still high effect of distressed homes passing through the market, despite ever fewer of them entering the process. The data show clearly this is going to diminish further.

For a more granular example, I track 3 zips very closely that were hard hit by foreclosures, due to copious new home building in 2003-2006: 85042,85041,85040. I track them because I own 3 properties in the area. For newer single family homes, built since 1990, I have been tracking the number for sale uner $140K. Two years ago, it was in the 70′s, a year ago, in the 30 to 40 range. 5 months ago, it dropped under 10, and prices shot up by $20K or so in a period of a couple months. Today, there are 26. Of the 26, 10 are bank owned or short sale.

So, we see clearly, that in some areas and prices, distressed homes are still a serious price prediction factor. As these distressed homes further decline in number, I expect prices to increase DESPITE increasing supply. Of the remaining 16, 5 are short term flips. (homes bought cheaply usually as a short sale, painted etc and sold) As there are less cheap homes to buy from banks, these returning listings will also decline.

However, in the aggregate, the Phoenix market lull I predicted several months ago, is in place, and seems strong enough to generally last deep into spring and summer of next year. Perhaps all of next year.

By next year, I expect both short sales and bank owned homes to be a thing of the past, and prices will rise slowly even with 4 or 5 months of inventory on the market.

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What happens after the last short sale?

In the month of May, 9400 sales occurred in Maricopa County. Of those sales, I count 1190 short sales, and 915 bank or HUD owned homes. Distressed inventory made up fully 25% of all sales.

Foreclosure filings have been on a steep descent for quite some time now, down from a high of over 10,000 new trust deed sales filed a month, to 4500 a year ago, to under 2000 currently. In May, there were 1600 new filings, with 1200 cancelled sales, and 1000 actual foreclosures. These ratios have been relatively constant, so we can predict that roughly 40% or 640 eventual foreclosures were added to the future in those 1600 new filings, while 1000 actually occurred, clearly, an unsustainably high rate given the paucity of new filings. The actual number of homes in foreclosure dropped by 650 on the month, and is now poised to go under 10,000 for the first time in 7 years. It is nearly back to pre bubble levels.

It seems that banks have moved the dispossession of their troubled inventory largely from actual foreclosures to short sales. So, the short sale number bears watching as an important market statistic.

In July 2012, I first began tracking short sale numbers on the Maricopa County MLS, to document their numbers. At that time, there were 1101 active short sales, 10689 pending or under contract (UCB). Today, we find 630 active short sales, and 4560 pending or under contract. Short sales have dropped by 50% in less than a year. So, absent a sudden increase in short sale listings, it seems quite clear that we are going to see a steep drop off in both short sales, and foreclosures in the near future.

How will the market change, when short sale + foreclosure sales drop to less than 10% of the monthly transactions?

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Observations, and perhaps a surprise in the Phoenix data.

 

http://www.deptofnumbers.com/asking-prices/arizona/phoenix/

Well, Phoenix housing listed prices have been completely stable for two weeks. I count active inventory at 15931 today… so basically stable as well.

I have to admit, I am a bit surprised by this. Sales have come flying back, in my rolling 30 day count, I am now seeing 9000 give or take on the mix of business days/weekends in the count, whereas a january was around 6000. So, the entire mls has less than 2 months inventory, and in many price points, like single family homes within 25 miles of downtown, 3/2/2car garage, 150k to 200K, there is literally like 2.5 weeks inventory.

Meanwhile, foreclosure have plummeted, new filings are down 60% from last year. Even short sales are less numerous this year than last year.

Considering how fast prices had been rising, a couple of weeks of stable prices could just be statistical noise in the continuing uptrend. I wouldn’t expect price increases to stop with supply and demand still this out of whack.

So, I investigated further into what homes are being listed these days.

Analysis of the last 7 days listings:
short sales = 103
REO/HUD = 183
No special listing condition = 1618

So, I decided to look at the new non-distressed listings. I picked 10 random homes, not distressed:
1 flip
3 long flips (over one year between distressed sale and current listing, possibly investor, possibly owner occupied, I can’t necessarily tell which)
6 normal sales.

then, I decided to take a closer look at 150k to 250K, the starter home market in Phoenix.

I pulled 20 random non distressed homes:
1. short sale preforeclosure, owner/agent lying and not disclosing this fact in the appropriate part of the listing (hence it came up in my search)
2 new homes.
5 long flips
12 normal sales.

Obviously, 10 and 20 are too small of data sets to use as a survey, the error bound on statistics would be too high for any reliability, but it is a bit of a time consuming process, and I’m just trying to get a bit of preliminary data.

A couple of conclusions:

1. clearly, Phoenix prices have risen enough, that apparently a lot of people can now sell, who may have wished to sell for a while.

2. Even some people, investors or regular owners, who got smoking deals out of the crash in 2009, 2010, are going to sell now.

So, my conclusions from what I’m seeing, are that prices are likely to keep rising in the near to mid term, as supply and demand are still out of whack. But the market could be starting to enter a new phase. I’m not expecting the rapid price increases of the past year to continue, if i had to make a guess, i’d say about 10% more up generally through this selling season, with a possibility of more normal listings blunting the increases by late summer.

Obviously, with the volatility the Phoenix market has seen over the past 3 years, this an area by area phenomenon, and not all are going to act the same.

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