For anyone who owns or rents property in Arizona, the road to recovery has been just as rocky as the road to sales recovery. Trends guidng it have affected the rental market too, and not always with positive results. Lately we are seeing the rental market being highy infulenced by the large investment firms who’s buying sprees of huge blocks of homes has begun to slow.
Rents for single-family homes are rising slower than property prices as firms such as Blackstone Group LP (BX) flood the market with homes for lease, posing risks to investors betting billions on the burgeoning market.
Monthly payments for properties in Phoenix rose 1.3 percent in February from a year earlier, compared with a 25 percent jump in for-sale asking prices, according to Trulia Inc. (TRLA), which operates an online listing service. In Atlanta, asking prices climbed 14 percent as single family rents gained 0.5 percent, and in Las Vegas rents dropped 1.7 percent even as asking prices soared 18 percent.
While private-equity firms are helping real estate values recover from the worst slump since the 1930s by cutting the supply of foreclosures for sale, they’re also crowding the market with rentals. Leases for U.S. apartments rose 3.9 percent in February from a year earlier, more than quadruple the 0.9 percent increase for single-family homes, Trulia said.
“Investors are buying homes, in part, to rent them out, and that has added a lot of rental supply, and that’s preventing rents from rising,” Jed Kolko, San Francisco-based Trulia’s chief economist, said in a telephone interview. “It means some investors will start to think about selling those single-family rentals.”
Changed Market
“The institutional people have definitely changed the game,” McGary said in a telephone interview.
Investors flocked to Phoenix after home prices plunged 56 percent from their June 2006 peak to a September 2011 low, according to the S&P/Case-Shiller index of home values. Last year, Phoenix rose the most in the 20-city index, making it harder for investors to find bargains then profit from renting.
Prices paid by the largest buyers probably rose more than the broader market because they’re competing to buy similar homes — typically three-bedroom houses built since 1990, said Oliver Chang, co-founder and managing director of Sylvan Road Capital LLC, an Atlanta-based single-family rental investor.
Pushing Prices
“They’re effectively pushing prices up on each other,” Chang, a former Morgan Stanley housing analyst, said in a telephone interview.
The median purchase price for a single-family home in Phoenix jumped 35 percent to $163,000 in January from a year earlier, according to a March 8 report by Center for Real Estate Theory at Arizona State University’s W.P. Carey School of Business. Median rents on a per-square-foot basis, meanwhile, dropped 3 percent in February from a year earlier after climbing 1.5 percent in the 12 months through February 2012 and 3 percent a year earlier, according to Fletcher Wilcox, a real estate analyst at Grand Canyon Title Agency in Phoenix.
Colony Doubled
In the fourth quarter, the number of homes major investor Colony Equity owned in Arizona, outside joint ventures, declined 1 percent from the previous quarter to 823 units, according to a regulatory filing.
“Colony came in with a bang and fizzled out once prices went up,” Michael Orr, director of the Center for Real Estate Theory, said in a telephone interview.
Orr estimated that large investors bought 8 percent of the Phoenix-area homes sold last year, peaking in July and August before tapering off as prices rose. Purchases by all investors dropped to almost 32 percent of transactions in January from more than 39 percent a year earlier, he said.
‘Rental Economics’
More than 5 million former U.S. owners have lost their properties to foreclosure or in a distressed sale since home prices peaked in 2006, data from RealtyTrac show. Last year, the total number of renter-occupied residences increased 1.1 million, while the number of owner-occupied households fell by 106,000, according to a Commerce Department report.
The apartment market has remained strong even as single- family home rental supply increases, in part, because the properties appeal to different tenants, said Greg Willett, vice president of MPF Research, a Carrollton, Texas-based apartment- data firm. While apartments attract young single people, houses draw in families, he said.
Phoenix Leases
Monthly leases in Phoenix’s west side, where investors bought the most rentals, fell by about $100 a month, or 10 percent, in 2012, said James Breitenstein, CEO of Landsmith, a San Francisco-based single-family rental firm that sold most of its 250 Phoenix rental houses last year. Rents also softened in Las Vegas and in Atlanta, where Landsmith acquired about 300 homes in the past six months, he said.
Phoenix Rentals
Major buyers of single-family rentals are concentrating on acquiring properties and filling them with tenants. The first step is to focus on stabilization. The next phase is to focus on growing rents. That will come later but has been slow to be realized.
For now, Phoenix landlords are lowering rents to fill units. Investors are competing with so-called reluctant landlords who are leasing their houses because they can’t afford the mortgage payments and have moved somewhere cheaper.
There are a lot of properties out there, so the competition to get your property rented is fierce. Tenants are very savvy. If you’re overpriced by $25, they’ll let you know and go to another one around the corner.
The good news for metro Phoenix is that home values are still on a steep upswing — by more than 35 percent in November, to be exact — and foreclosures and short sales continue drying up. Ironically, that leads us to the bad news, which is that the Valley may be headed toward — and I quote the words of a local expert — a “chronic supply problem.”
Michael Orr, a real estate expert at Arizona State University’s W.P. Carey School of Business, released his latest housing report on Thursday stating that last year’s surge in Valley median home prices continued through November, which also climbed by about 3.5 percent from the previous month to $162,500.
The boost, Orr said, has been gradually pushing out cash investors, who made up 27.5 percent of all Valley home sales in November. That’s still a high figure, but was nonetheless down from the August peak of about 35 percent.
Much to the relief of traditional homebuyers, who typically need financing, fewer investors could mean a less competitive market in 2013, he said. But their woes may not end there.
The price surge has been driven by an abnormally low supply of homes for sale in the Phoenix market — and Orr believes the problem may persist, or even worsen, this spring.
“We don’t see a strong flow of new listings coming onto the market,” Orr said in the report. “For example, short-sale listings are down about 70 percent compared to this same time last year. As the market improves, it seems many people may have decided to hang onto their homes in an effort to let values keep going up. I also anticipate another possible drop in supply this spring.”
In recent months, competition for the few homes for sale has grown increasingly fierce, and more often than not favors those with cash-on-hand. Ordinary buyers have thus turned to the new-home market out of frustration. While the investor trend seems to be waning, the supply problem persists, and “Unless new-home builders can start keeping up with rising demand, we may have a chronic supply problem,” Orr said.
On Dec. 1, almost 13,500 single-family homes were for sale on the Arizona Regional Multiple Listing Service, according to Orr’s report. That’s down 7 percent year-over-year, but was still 8 percent better than November and up by almost one-third from September. But supply may dip again early this year as the number of distressed properties that once flooded the market continues to dwindle.
In November, there were 34 percent less completed foreclosures year-over-year, nearly 48 percent fewer homeowners that started the foreclosure process and a whopping 43 percent drop in overall supply of distressed properties, the report said.
That means bargain deals are now increasingly harder to come by, with homes priced below $150,000 making up only 6 percent of all supply — or about 810 homes — on Dec. 1.
“As prices go up each month, price-sensitive buyers, such as investors, get a little less enthusiastic,” Orr said. “Bargain hunters haven’t got much left to pick over, which is allowing more normal buyers to jump into the market before prices rise past what they can afford.”
The next few months may be a good window to purchasing a home as investors drop off and before prices surge up.
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