Phoenix, Arizona – Phoenix skyline as seen from the Ferris wheel at the Arizona State Fair on October 8, 2022 in Phoenix, Arizona.
Joshua Lott/Washington Post | Getty Images
Phoenix is closer to winning the battle against inflation than most other cities. And its recent experience confirms what economists and the Federal Reserve have been claiming for months but have struggled to nail down a precise timeline: When rents fall, they typically Inflation will also fall.
Consumer prices in Phoenix rose 2.6% from April 2023 to last month, lower than the national rate of 3.4% and the rate of increase in any other metropolitan area tracked by the Bureau of Labor Statistics. Inflation in the city has been below 3% since October of last year and fell to 2.2% in February, just above the Federal Reserve’s national target of 2%.
The economic slowdown comes six months after the presidential election, which could very well be decided in Phoenix’s Maricopa County, the nation’s fifth-most populous city and where the 2020 vote narrowly favored President Joe Biden. It’s happening before it even happens. But while political strategists are focused on Arizona’s economy, so are economists and nonpartisan central bankers.
Chicago Fed President Austan Goolsby said last month that “housing inflation remains my most valuable indicator for the foreseeable future.”
And in Phoenix, both rents and home sales have cooled so far last year.
The housing crisis is ‘over the worst’
The median home sales price in the city actually rose 5.1% from April 2023 to last month, to an average of $450,000, according to Redfin. But the surge comes amid weak sales, with home sales down nearly 3% compared to the previous 12 months.
More home sellers appear to be succumbing to lower asking prices on more than 31% of Phoenix homes in March, according to Redfin data. This is significantly higher than the national average of nearly 18%.
“The worst is likely over in terms of significant and sustained increases in rent and home prices in Phoenix, and we will return to a situation that reflects more normal trends,” said real estate industry expert Mark Stapp. ” he said. Professor at Arizona State University W. P. Carey School of Business.
Cheryl Bowden, president of Realty Executives in Phoenix, said real estate agents at a recent industry event she attended kept asking each other if there were any showings.
“Everyone pretty much had blank stares,” Borden said. He said the home-buying market “screeched to a halt.”
This cooldown coincides with a decline in the number of people moving and an increase in housing construction, which together are also easing rent inflation.
The city’s population growth rate fell from an annual rate of 1.6% in 2019 to just 0.4% by 2023, according to a census analysis released Thursday. At the same time, Phoenix is currently flooded with rental inventory “like nothing we’ve ever seen before,” said Brent Moser, principal at Lee & Associates, who has worked in commercial real estate in the city for about 25 years. Told. Projects conceived just before and during the pandemic are finally being completed after supply chain issues held up many projects.
“It’s going to be a tough adjustment period” for rental agents, Moser said, with vacancy rates in some apartment complexes as high as 11%, compared to what he considers a typical healthy market of about 6%. He added that it was far superior.
But there could be good news for renters, with Moser saying he expects rents to fall 2% to 4% over the next 12 to 18 months.
That doesn’t mean Phoenix, or all of Arizona, has solved its housing affordability problem. Researchers at Arizona State University estimated earlier this year that the state still has a shortage of about 270,000 homes, with only 26 units available for rental for every 100 very low-income households.
However, this progress has contributed to lower rents. The median rent for a one-bedroom apartment in Phoenix in April was $1,300, down 7% from a year earlier, compared to just 0.6% nationwide for the same period, according to listing site Zumper. Meanwhile, Phoenix residents are benefiting from wage increases averaging 5% a year, giving them more purchasing power as inflation declines.
How rents affect inflation
The metropolitan rent slump has given some momentum to the overall “shelter in place” index that the BLS widely uses to measure the cost of keeping a roof over your head, whether you rent or own your home. It’s gone. The annual rate of increase in the index in Phoenix in April was 3.5%, slower than the 5.5% increase nationally.
The cost of shelter accounts for about 36% of the Consumer Price Index, an inflation measure closely monitored by the federal government, but the cost of shelter is Calculating an index that reflects this is difficult.
For one thing, rental agreements typically require renters to reset costs each year, further complicating what the BLS describes as the “fairly complex” design of housing cost assessment studies. Another is that a homeowner’s mortgage payments may not reflect the market value of the property. As a result, BLS economists use surveys of renters to estimate how much a home will cost in rent in a given month, as part of a bucket called “Owner’s Equivalent Rent” (OER). doing.
“This partly reflects, as a homeowner, if you were to rent this place out, what would you rent it for?” said Omail Sharif, founder of research firm Inflation Insights.
As a result, rental prices have a greater impact on how inflation is measured than house prices. Therefore, if rental prices in an area fall, shelter costs will fall, and likely overall CPI inflation will fall as well.
In other cities where local inflation rates are lower than the national average (currently Houston and Anchorage, Alaska), lower shelter costs are also an important factor, but the numbers for metropolitan areas are generally It may be unstable due to
The Fed can influence demand by raising interest rates, which indirectly contributes to higher mortgage rates, but the central bank cannot build more houses or apartment complexes. It can only monitor housing data, much of which provides a lagged snapshot, and factor that into interest rate decisions.
“There are many places in the economy where the inflation process just has a built-in lag structure, and housing is one of them,” Federal Reserve Chairman Jerome Powell said on May 1.
Sharif said such delays could last up to a year and a half. That means rent slumps in other cities, like Phoenix, may already be shaking local markets, even though they aren’t yet reflected in national data.
“It’s going to take some time,” he said.
