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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About robertoaribas

Math professor, Realtor. 12 years of buying, selling, investing and managing rental properties. rock-climbing and salsa dancing. robertoaribas@gmail.com
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5 Responses to continued observation on Phoenix market

  1. John Wake says:

    Roberto, so what’s the conclusion regarding rents? Landlords should lean more toward holding instead of selling?

    • It is definitely something to think about! I had an offer of $130K for one of my rentals six months back, in 85040. (I bought it for $46K +$13k in rehab). It is currently rented for $900 a month. After tax, insurance, HOA, a $90 management fee, and I estimate $1000 maintenance a year, I make around $400 a month on it. I own the home free and clear. That is a big pile of money to have in one’s hands instantly if I sell it! (after depreciation recapture, and long term capital gains tax, i’d estimate a windfall of maybe $112,000?) I counted at $140K, and they didn’t bite. today it would be a bit tough to even get the $130K….

      BUT if I knew for certain that rents would be $1100 a month in 3 or 4 years, I wouldn’t sell at either of those prices. Then suddenly I’m making an extra nearly 50% a month… that changes my return calculation quite dramatically, and pushes it up to 7 or 8% after everything, a dividend I can’t possibly get anywhere else in this world.

      If you don’t need the cash, I would say hold out. A landlord can win one of two ways: prices increase OR rents increase, and should be happy with either one!

      • John Wake says:

        Cool! I hadn’t been incorporating the possibility of rent increases when landlords call and ask for advice about whether to renew lease vs. sell and cash out.

        I’ve been saying homes aren’t likely to appreciate much in the next year so don’t plan on much or any appreciation in your decision making.

        But it sounds like you’re forecasting higher rents so I should mention that as something to also consider.

  2. John: One thing I have to say, our Phoenix market sure has made life interesting! Since I have 14 rental properties, obviously I have a huge interest in knowing what will happen to both prices and rent in the next few years, and things can just suddenly change here… Unlike the flippers, I’m not concerned about how quick I can make a gain, I want to absolutely maximize my total return, and thus am much more willing to take a longer term approach. If I sell a home for $130K today, but I could have rented it for 10 more years and then sold it for $160K, that is a lot more total return for me! Even if the price stayed $130K, if rents go up over time, that still makes selling it a less than optimal move. I use the New York Times rent versus buy calculator to analyze each home, but instead of its selling price, I put in what I would get after depreciation recapture (25% of all years depreciation tax deferment) and long term capital gains which are 20% I think, and all of my title costs. Then, I play around with rental appreciation from 0 to 3% or so, and price appreciation from 0 to 3%. You can test some scenarios and see where the long term break even point is.

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