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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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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4 Responses to Continuing plunge in rental inventory.

  1. John Wake says:

    Roberto, could you define the rental absorption rate?

  2. Sure John, it is the same as the sales absorption rate: Inventory/prior months closed.
    Today, I’d calculate that at 5664/3605 = 1.6 Numbers tend to fluctuate at the end of the month, some listings expire, some agents don’t update lease files in a timely manner. So,I’d expect that 3605 number to actually increase over the next week as that happens.

    • John Wake says:

      Thanks! I don’t follow rentals so I’m not very familiar with the stats. Do you have a “normal” range in mind for rental absorption rate?

      For example, for home sales, I consider 4-6 months supply normal although other people’s opinions vary a bit and some go as low as 3 months supply and others as high as 7 months supply. I don’t think I’ve seen anyone say “normal” is below 3 or above 7.

  3. John:
    I didn’t follow rentals too much, and truthfully, up until a few years ago, the mls did not have many rentals on it, either listed or rented. So, it is very hard to look at today’s data with any historical perspective. However, now it is bigger, and therefor I view it as more indicative of the rental market generally.

    I have always used it for pricing my rental listings though, and in a certain area/price/size range, I didn’t want to see more than 2 months supply. For example, 3br/2ba/no garage in 85201… under $1000 or whatever. Sometimes though you have to actually go and look at the properties, because some are utter crap, and thus can’t be comped to a nice one, etc.

    When I do those searches, today around my homes, rents are increasing, period. There are few to none price competitive with mine, and those that are, have some strikes: not available till march, difficult to see due to occupied, no lock box etc. (and many agents are quite lazy to even call back on rental listings, since they make so little on them. That alone can hold back a particular property)

    For the entire mls rental listings, purely going off of just general memory of looking at these numbers, I would say low mid 2’s is roughly balanced. If you look at the graph, we were in that range all of last year, and rentals went up a little bit in price.

    Also, fully 1000 of the available rental inventory has been on the market for over a year. While that sounds terrible, it really isn’t. Most of those are seasonal rentals, so even when they are rented for winter, they stay active with a calender showing when they will be available next. Some have been active for multiple years that way! In the past month, only 10 of the closed rental listing had been active more than a year, out of 3605 closed, So, that 1000 are not really part of the market we are analyzing! Thus, of the 5665 we have active today, only 4665 are really normal rentals that we are measuring in the rental market.

    The statistic that will drive the Phoenix market keeps changing. In 2006-2010, it was the foreclosure fillings. that was the number I measured, because when huge numbers of foreclosures entered the market, I knew it was doomed. When they slowed drastically, I knew the bottom was going to pass, and it was “now or never” to buy investment property. Today, I don’t bother to count foreclosures much, only out of mild interest, as it simply is not the factor that is driving our market now.

    My prediction, is that if this trend holds, which I think it will, rents will begin to climb. I think they will have to climb fairly substantially before it influences owner’s behavior. I don’t think many people who think of selling will say, “well rents have gone from $1000 to $1100 a month, so I’ll just keep the house!” At some point, it will influence renters behaviour as well. “rents keep going up, I should buy and fix a payment for life” But, I think both of those changes will be incremental, and only after rents have changed by fairly significant amounts, which will take probably years.

    On the other hand, for a patient investor, if you think rents may be 25% higher in 5 years, that is an utterly huge change to cash flow, particularly on a mortgaged property!

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