Saturday, March 5, 2022 / by Bryan Baylon
Although the re-sale and new homes markets continue to show very little sign of weakness, the same cannot be said of the rental market.
The vast majority of rentals do not hit the MLS, so we have to be careful because of the poor sample size. However the ARMLS rentals database shows us that the market is nowhere near as favorable to landlords as it was this time last year. Here is why we say that:
- Available supply is up from 1,543 to 2,138 units, a rise of 39%, meaning tenants are getting more choice
- New rental listings are up 20% year to date compared with 2021, so supply is arriving faster
- New rental listings are up 26% over the past 4 weeks, compared with 2021, telling us that the increased supply trend is strengthening
- The average lease list price per sq. ft. is $1.80, down from $1.93 this time last year
- The average lease list price per sq. ft. peaked at $2.01 on May 22, 2021, fell back then peaked again at $2.00 on Jul 29 before falling again - it is unable to convincingly break the $2 resistance level and has made no attempt to do so in the last 7 months
These conditions suggest that the era of quickly rising rents in Greater Phoenix may be coming to an end. A large amount of new rental supply is coming on board this year, judging by the number of multi-family permits issued in the last 2 years. Rent looks likely to stay fairly flat, which will change the buy versus rent equation as home prices and mortgage rates continue to increase. In the longer term, this could seriously dampen demand for homes to buy.
Interestingly, the supply of active listings varies a lot by dwelling type.
- apartments to rent are down 33%
- townhouses to rent are up just 1%
- single-family detached homes to rent are up 99% - there are 1,546 versus only 777 this time last year.
We are seeing single-family subdivisions under construction intended to be 100% rentals. There are many examples, and not just here in Arizona, but a typical one is Malone Place Parke (MCR 1561-18) in Queen Creek. American Homes 4 Rent has created their own homebuilding subsidiaries. There are 97 single-family homes going up here which will not have affidavits of value since they will be eligible to claim a genuine B7 affidavit exemption. The opportunity to grumble again about Zillow's misuse of the B7 is hereby declined. The investors in these projects should keep in mind that demand is not infinite.
The most likely source of more supply of single-family homes to buy is if landlords tire of owning them. This could be because they have trouble finding tenants for them or they facing declining rental incomes. A house that has no rent coming in becomes a serious problem for its owner who remains liable for the property taxes, maintenance, HOA dues, etc.. Landlords will then compete with each other for tenants and rents will start to drop. Some landlords will drop out and sell their investments.
This is likely to be a slow moving trend in the market but it should be easy to detect, as long as you are watching the correct numbers. US birth rates are very low by historic standards and with the baby boomers reaching advanced ages, we can expect natural growth in the population to be small, or even negative. Population growth will be entirely dependent on incoming transfers from other states or foreign countries. Ivy Zelman has been bearish on the housing market for a couple of years, primarily because of these demographic trends. She has been completely wrong about the market so far, but she is right that the demographics are fundamentally unfavorable for housing in the longer term. In Arizona we are atypical in that so many people have been moving here. This hides the weak natural growth in population (births minus deaths) and has driven our prices up faster than almost any other part of the USA. This will not last forever.
In Arizona, we have a history of building more and more homes until there is a very obvious reason to stop. There will come a time, and nobody knows exactly when it will be, when we have built enough shelter for the population and demand sinks below supply. I seems likely that we will see that in rentals before we see it in homes for purchase.
Market incites provided by the Cromford report.