Higher priced areas have seen moderate appreciation of 10 to 20 percent, while less expensive areas have much larger increases of up to 35 to 50 percent. Using current median housing prices of $325k, first time buyers of an FHA loan with only 3 percent or $10k down could expect to pay around $1,480 with PMI. Loan re- quirements of 30 percent of income would require $60k/year to qualify. With taxes and insurance, it would cost around $1,750 to $1,850/month. With all-in house payments only slightly more than rent, the income requirements could be pushing rent- ers to buy in this environment. Land- lords requiring income to be 3x rent would require $62k/year of income, which is slightly above the income reqs for purchasing a property. Affordability issues are a growing concern. In a 2019 study, the NLIHC stated Arizona now has the third most severe affordable-housing shortage in the country. For every 100 extremely low-income people in the state, there are only 25 potential places they could afford to live. Even with aggressive rent increas- es over the last several years, the Phoenix MSA has a rent-to-income ratio of 32.5 percent for SFR prop- erties, slightly above the national average of 32 percent. Rent-to-in- come ratios near central Phoenix, Mesa and Glendale range between 35 percent and 50+ percent, as these areas have a larger segment of low- wage earners. Suburban areas show a moderate rent-to-income of 20 to 30 percent. WHERE DO RENTS GO FROMHERE? Phoenix Rental Rates Prediction 2020 Rent prices were overheating before the pandemic and are begin- ning to slow. The aggressive price increases have increased rental listing days on market by 25 percent
YoY through June. Anecdotal reports from many of the large institutional firms have reported excellent rent collection from their SFR portfolios through June. However, smaller landlords have begun reporting non payments on 1/4th of their properties, partly due to limited work-out plans they can offer tenants. The governor of Arizona has stopped COVID-19 hardship related non-payment evictions through Octo- ber, but all other eviction policies may still be enforced. Eviction policies and the extension of increased unemploy- ment benefit could lead to a signif - icant number of vacancies unless federal extensions are passed soon. Risks stem from the large num- ber of lower-income jobs affected by the spiking unemployment, and tenants may struggle to keep up with payments. Increased evictions will add to vacancies and lower overall demand. Mid- to high-priced rentals will see a drop in demand as some areas are less expensive to own than rent. Unemployment may remain elevated, reducing qualified tenants and putting further downside pres- sure on rents. 2020 SFR Rent Price Forecast: -3 percent to +2 percent Our 2021 forecast is cloudy, with many unpredictable variables in play. Until employment and wages recov- er, single-family rental rates may face a shorter but similar stagnant appreciation period as seen between 2010 to 2015. If the virus issues abate and all segments of busi- nesses can return to full capacity, this will help rental prices recover. However, in order to support higher rents, wages not only need to recover but also increase above current lev- els, which could take several years. Demand will stay elevated for sin- gle-family rentals as renters move away from multifamily units. The increase in demand may be equally balanced by increased inventory
from Build-to-Rent developments, and renters in a good financial posi - tion will convert to buyers. 2021 SFR Rent Price Forecast: -5 percent to 0 percent CONCLUSIONS No doubt the Phoenix single-fami- ly investment market has been hot in the past several years. It has been a favorite target for investors since the last recession for several reasons, including strong equity and income appreciation supported by rising population, job growth and wage increases. On the other hand, being the #1 market for rent price increases may not be ideal when nearly 10 percent of the workforce is sudden- ly unemployed. Rent prices were already reaching an inflection point before COVID hit, and low interest rates have created an environment where it is cheaper to own than rent for many areas of the market. The Phoenix SFR rental market is currently overheated and needs a cooling period to get the economy back on track. Even if there is a moderate pull- back in the next 1-2 years, we don’t foresee a meltdown like the last recession. Owners have a record amount of equity built up, and a myr- iad of government programs to work with borrowers and mitigate another foreclosure crisis. Bottom line, Phoenix has good fundamentals but is currently pre- senting a challenging environment for cash flow investors. Low cost, high yield opportunities are scarce due to the limited inventory and new-buyer demand. Prudent inves- tors may want to wait for the for- bearance period to expire and look for distressed sales next spring. •
Fred Heigold III is the senior data analyst at Altis- ource® / RentRange®, an industry leader in market data and analytics for the single-family rental housing industry.
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