R.O.I. Real State – Residential Newsletter- March 2022
Posted on March 1, 2022
From February to March 2022, the supply-demand index dropped from 471.8 to 458.9, with the demand index returning to the cusp of normal range for the first time since summer of 2021. Affordability remains at the forefront of concerns for the housing market: Public record filings show 64% of purchases in Maricopa and Pinal were owner-occupiers in January. Normal range is between 70-76%, and the percentage of investor purchases is the highest since 2013. Back then, normal buyers couldn’t qualify because their credit was destroyed by foreclosure, short sale, bankruptcy and/or unemployment. That’s not the case today. Normal buyers are the strongest financially in years with record high credit scores, down payments, and income. Even so, they’re increasingly outbid by Wall Street institutions brimming with cash and euphoric over real estate once again.
Last month, we noted the potential impact of interest rate and price increases on the residential market’s health. This month’s cautionary note comes with a rise in available rental properties at decreasing rental rates—currently being experienced in single-family rentals and likely carrying over into multifamily as new inventory is completed. If rental supply really starts increasing, this will signal changes ahead for the housing market in general.
You can read all the details in the R.O.I. Properties “Real State – Residential” newsletter, with additional statistics, market trends and information, but here’s a quick peek at the highlights:
Active Listings: Supply continues to hover slightly above last year’s measure, sitting 6.2% higher than this point in 2021. Last year, supply counts started to increase at a faster rate after May. This was believed to be caused by a segment of homeowners settling with their lenders, exiting forbearance, and selling their homes after appreciating an incredible 39% in just a year. At the same time, affordability measures had dipped below normal for the first time since 2018, causing household formation to retract. The result was a welcome rise in supply, but not enough to reach the pre-pandemic levels of 2018 and 2019. While supply measures in 2022 are following a similar path, the circumstances are different and it’s unclear if they will rise in a similar manner. Forbearances are largely resolved at this point, but the dramatic and rapid increase in mortgage rates will most likely cause owner-occupant buyers to retract and household formation to weaken once again. It’s reasonable to expect supply to rise sometime in the next few months in response to this drop in demand. For now, however, the only supply count that’s seeing a dramatic rise is the number of rentals listed in the Arizona Regional MLS, up nearly 60% since September.
Sales Volume & Price: Demand for homes continues to be high, and while sales volume is slightly below last year to date, the MLS has closed the second highest number of homes ever. Mortgage rates spiked again this month and reached an average of 4.1%, which is the sharpest rise seen since the 1980s; the impact of inflation is causing many to wonder when the effects will be seen in housing prices. The first place to look for a crack in the foundation of this seller’s market is in rentals. The proliferation of institutional landlords and short-term vacation rental investors complicates the demand numbers, because they don’t rely on interest rates, are susceptible to investor euphoria, and can pay much more for homes than the population can afford. However, they still need the population to afford to rent their homes after they buy them. Over the course of the past year, asking monthly rents on vacant rentals in the MLS rose from a median of $1,995 in March 2021 to a peak of $2,395 by September. During the same time frame, closed rent prices stopped rising and stagnated at $2,100 after mid-July. By September, the supply of rentals in the MLS began to accumulate, then exploded at the beginning of 2022—especially in Maricopa, Queen Creek, Gilbert, Laveen and Buckeye, as completed new homes were closed and immediately added to the rental pool. While closed lease prices on rentals with 3 bedrooms or less are steady, they’re not rising; 4 bedrooms or more are seeing closed lease prices decline.