It was amazing to me how many intelligent people refused to believe we were in a bubble in 2004-2006. Now it is amazing to me how many intelligent people refuse to believe we are now in a genuine recovery. At both times the facts and figures were patently obvious to anyone with an open mind, but the determination of people to believe what they want to can overcome any mountain of facts. Real estate is clearly cyclical, and this recovery cycle is still young. Prices haven't even got back to the long term trend line yet. When the down cycle comes into view you will hear about it in my blog. People who always think the market is headed south are no more use than people who always think it is going up.
Having started to give up on the patently silly theory that a huge shadow inventory of lender owned homes will flood the market, the skeptics are developing a new theory that buy and hold investors will discover that property management is more complex and expensive than they thought and dump a load of rental homes back onto the market at once. This is supposed to create a second drop in prices. Like most popular housing doom theories there is a grain of truth to this concept, but the bulk of it is nonsense. Property management is certainly a varied and complex challenge, but landlords have been doing it for centuries and the majority of them have done pretty well. One solution is letting an experienced property management company do the hard work for a fixed percentage of the rent. Any investor who has underestimated this task can get out now by selling at a large percentage profit and handing the home on to a landlord who understands how the real rental world works. There are more than enough professional investors around who know what they are doing and their appetite for additional properties is only slightly diminished since last year.
The really serious threat to landlords is not unexpected property management costs but long term vacancies. These are much harder to predict because the future demand for rentals is essentially unknown. In addition, vacancy rates for single family homes are very difficult to measure. However it is abundantly clear that vacancy rates are still low right now, given how many people apply to lease most available rental homes. We currently have 6,889 active rental listings on ARMLS, a bit higher than last year at this time (6,045). but much lower than peak levels such as the 8.895 we saw in 2009. At some point in the future we will have more than enough rental properties to satisfy demand. We are not at this point yet, but when we reach it the savvy investors will gradually dispose of the surplus properties feeding them back into the owner-occupied market. Of course the skeptical pessimists assume that the investors are stupid and that they will exit the market in a panic sell-off. To be frank, this is as ridiculous as assuming that banks like to hoard homes and hide them from market observers.
The basic issue that the skeptics seem to overlook and disregard is that we have a real and chronic shortage of homes in Phoenix relative to the population. This imbalance is due to continued population growth while the home building industry stagnated for 5 year between 2008 and 2012.
My advice to a skeptic is this: spend a couple of weeks trying to buy (with a loan) just one decent home in a reasonable area of Phoenix or the surrounding cities for less than $175,000 (which is well above the median sales price). It is a nightmare task, and not just because of competition from investors. There is plenty enough competition from other owner-occupiers to make your assignment very frustrating. Bidding 15% over list price doesn't usually work because your appraisal will come in too low.
In Phoenix affordable housing in central areas is so scarce that a large number of rentals coming back onto the market would have a welcome stabilizing effect. Thousands of normal owner-occupiers with good credit are struggling to find anything to buy at all. For this to change we need a lot more supply. Where is it to come from? The home builders are ramping up only slowly and their subdivisions are mostly in outlying areas. If you wish to live centrally you will probably have to set your sights on a re-sale. Good luck with that!
The only way this gets resolved is for prices to go higher still. This brings out more sellers and we will know we have enough when active listings on ARMLS go back over 32,000 again.
Investors will no doubt sell much of their inventory over the next ten years realizing a significant capital gain. However the homes they sell are currently occupied by tenants. Therefore the sale of one of these homes in the near term will not add to the net supply because that tenant will either stay in the home or have to live somewhere else. Net inventory will only grow when an empty rental unit is sold onto the open market. This is still a fairly rare event in 2013, unfortunately.
Sorry been awhile since the last post so this got a little winded. Great info. though. Call and let's chat.
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