Outsiders Fuel Phoenix Frenzy
By: Tom Brady
The Phoenix housing market might just be too hot for its own good. If home prices increased through the end of the year as quickly as they have so far this year, the median sale price would hit $514,000 by the end of the year.
No one in their right mind believes that is possible, but prices so far have not found their peak. According to Redfin, Phoenix home prices were up 29.5 percent in July compared to the previous year, selling for a median price of $395,000. The median sale price is now up to $399,900, and homes are selling after 25 days on the market, down from 40 last year.
These numbers are starting to create affordability issues for some longtime Phoenix residents, because apartment prices have been rising as well.
The average price for a 2-bedroom apartment in Maricopa County has gone from $908 a month in 2015 to $1,281 a month in 2021, according to the U.S. Census Bureau. According to a recent Zillow survey of the 50 largest metro areas, Phoenix led the top 35 metro areas, with 8.4 percent annual growth in single-family rental homes, followed by Sacramento (7.6 percent) and Indianapolis, at 6.9 percent.
“We’ve got a lot of people who are falling further and further behind,” Mark Stapp, director of the real estate program at Arizona State University’s WP Carey School of Business, told a Phoenix television station recently.
Those affordability issues can be partly traced to the influx of people from nearby states, where housing costs tend to be much higher than in Arizona.
Devyn Gillespie, sales director for Mynd in Phoenix, said a lot of these out-of-state buyers are making offers in cash and squeezing out locals.
The data confirms this. More than a quarter of Phoenix's prospective out-of-state buyers came from Los Angeles, and another 17 percent from Seattle, according to Redfin. And more than a third of sales were in cash this spring in the greater Phoenix Metro Area.
And as long as fewer houses are put on the market, prices are not likely to come down. “The inventory shortage is worsened by the affordability issue,” Gillespie said. “People have nowhere to go if they sell their homes.”
The rental market for homes is competitive as well. Bohling said single family homes rented through Mynd in the Phoenix area are off the market in less than nine days, about half the company average. He attributes this to the folks moving to the area and the desire for more space, as well as the fact the fewer people are moving out of their rentals. Finally, more owners are selling rental properties to take advantage of soaring prices.
(Really) Hot (and Very Dry) Weather
The question is how much longer such demand will drive up places, and those who moved to Phoenix realized what they were getting into with the intense weather. While home values seem like a bargain for those coming from California, Washington and Oregon, the area’s heat index might be more than they bargained for.
Noting that the forecast was calling for a 115-degree day in mid-June, Bohling wondered if folks from cooler climes would be able to handle it.
“The biggest test is going to be the summer,” Bohling said. “Is the cheaper cost of housing worth the hot summers?”
One of the main hurdles developers face in the Southwest is adhering to the area’s strict water restrictions. Developers need to show that they can provide 100 years of water to their homes, according to Bohling, either by tapping the groundwater at their site or buying groundwater from a nearby source.
And the Southwest is experiencing one its most severe droughts in decades. Extremely dry conditions exist in more areas than they have in the last 20 years, according to the U.S. Drought Monitor, the government’s official drought-tracking service. The city is spending $280 million on a 66-inch pipeline, expected to be completed in 2023, to move water from its Salt and Verde River reserves to North Phoenix. The goal is to reduce its reliance on water from the Colorado River, which feeds Lake Mead, which is its lowest level since the 1930s.
New Areas for Growth in Greater Phoenix Metro
As for real estate investors looking for opportunities, Bohling and Gillespie pointed to developments planned for the Eastmark area in Pinal County, south and east of Phoenix proper. The country’s largest home builder, D.R. Horton, and the U.S. arm of Canadian builder Brookfield Residential, are going to develop a 2,800-acre master-planned community near the Superstition Mountains, which will have more than 10,000 homes and nearly 30,000 residents.
Two electrical vehicle makers, Nikola and Lucid, are locating to Southeast Pinal county, another driver for growth there. Nikola has broken ground on its $1 billion plant in Coolidge for prototypes and some production work on its trucks and other zero-emission vehicles, where it plans to employ 2,000 people. Lucid opened part of its factory in Casa Grande in December, where it eventually plans to build 400,000 electric vehicles a year and employ some 2,000 people.
In Phoenix Metro, No Escaping Sprawl
For investors who are looking to build, fix up and sell a home, Gillespie suggests they look elsewhere. “Good luck finding a home to flip,” he said.
All this building will just add to the sprawl that is the greater metro area of Phoenix, but Bohling and Gillespie said that demand in the area is for newer and bigger homes. Unlike older cities where more marginal neighborhoods will undergo gentrification when housing prices surge, Phoenix does not really have that type of housing stock, nor is it difficult to get around town in a car. (And most people try to live near where they work, Bohling said.)
“There is not enough density to call for a transport system,” Gillespie said. With 5.5 million people spread across a metro area that measures some 50 miles from north to south, traffic is not unmanageable “because we have sprawl and everybody is going to a different place,” he added.
There is a light rail system, Valley Metro Rail, that runs from northwest Phoenix through Tempe to east Mesa, but Gillespie said it is underused. The highway system, built in recent decades, is modern and efficient.
Affordability Is Within Reach for Most
For all the talk of rising prices in Phoenix, most homes on the market are still affordable to most people, assuming they spend about 28 percent of their gross income on housing. A family making the median income of $79,000 in Greater Phoenix could still afford 62.8 percent of what sold in the first quarter of 2021, according to the May market report for Arizona from Metro Realty.
According to economists and realtors at Zillow, Phoenix is expected to be the second hottest real estate market in the U.S. this year, trailing only Austin. Property values in Phoenix grew by over 30 percent from June 2020 to June 2021, Zillow reported, compared to only 10 percent the previous year and 5 percent from 2018 to 2019.
Forecasters see little letup in demand in the rest of 2021. For those who own homes in Phoenix, the rental market is attractive. The rent for an average home is about $2,000 a month and in some neighborhoods, well over $2,500 a month, according to AZBigMedia.
Early Signs of a Cooling Market in Phoenix
And though Phoenix is likely to remain one of the most competitive markets in the country, there are signs that it will become a little less stressful for buyers in the next few months:
- New listings rose by more than 25% over the past year, according to Realtor.com.
- Demand for home sales slowed in Phoenix in August, according to the real estate research firm Zonda.
- New home sales in August were down 31 percent from May and 37 percent from a year ago, Zonda reported.
Still, it will likely be several years for some normalcy to return to the Phoenix market since experts estimate the area needs about six times its current supply to reach equilibrium.
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