Affordability in the Arizona housing market is collapsing expeditiously due to an overall lack of inventory, rapidly increasing prices and rising interest rates, according to a new report.
Economists at the Common Sense Institute Arizona (CSI), a nonprofit research organization specializing in issues related to economic development, found that Arizona’s housing market is on a precipice.
According to CSI Arizona, housing has become less affordable because of rapid price increases and rapid interest rate hikes. And the problem is more severe in Arizona and the Phoenix Metropolitan market; Arizona housing prices have increased by 40% compared to 25% nationally since the end of 2020.
The report also highlights that Arizona’s housing shortage is damaging affordable housing as well. Findings suggest the 2006 housing peak, followed by the 2008-2009 recession, caused fewer homes built over the last decade.
“Simply put, demand is outpacing supply and people are paying more because of it,” said Glenn Farley, CSI Arizona director of policy & research. “Low borrowing costs have been enabling this for months but that is now coming to an end.”
Moreover, Arizona’s population growth is outracing available housing. Consequently, Arizona has an imbalance between availability and demand. Three hundred more people will move to the Valley today alone. Currently, Arizona is on pace to welcome more than 100,000 individuals at a time where few houses are for sale and rental occupancy is 98%.
CSI reports while Arizona is on the cusp of the largest home construction boom in a decade – which could close Arizona’s housing shortfall of 95,000 units within 5 years – it may not survive a weakening U.S. economy and slowing housing market.
The Home Builders Association of Central Arizona (HBACA) supports CSI’s research asserting, “The Arizona housing market is in the midst of a severe supply-demand imbalance which caused prices to rise quickly. For 33 consecutive months, between 2019 and 2022, the Phoenix market led the nation in home price appreciation. But we have now reached an inflection point with affordability. The combination of significant price increases with now rising interest rates leaves many buyers priced out.”
CSI’s home-buyer misery index (an economic model defining housing affordability as the normalized sum of interest rates and home prices over time), finds that over the last 30 years, Arizona’s housing affordability was relatively stable. Now, housing costs have surged since mid-2020 and 30-year rates have skyrocketed.
CSI analysis reveals that between August 2010 and August 2020, the buyer misery index increased at just 0.3%/month. Since then, it’s increased 2.3%/month – more than 7 times faster.
“Arguably, housing costs are now the worst they’ve ever been – double today the long run average and 31% above its prior peak in 2006,” continued Farley.
Lastly, CSI measured housing affordability by hours worked required by 30-year mortgage payments. In short, in 1989, the typical household had to work 64 hours to pay the monthly mortgage bill. Last year, only 41 hours. Today, CSI reports rising rates have increased costs, in terms of time worked, to over 65 hours and, at current prices, mortgage rates rising to 8% would increase time costs to over 90 hours.
“Realtors are actively involved in their communities, trying to help our clients find affordable housing,” Arizona Association of Realtors President Gary Nelson said. “The Arizona Association of Realtors will continue to be at the table – partnering with other groups and entities – to try as hard as we can to create more affordable housing in Arizona.”
HBACA shares this optimism.
“Builders are working every day to figure out ways to offer more affordable products. To do so, however, builders must navigate increasing land costs, material and labor shortages, and lengthy delays in the local permitting and approval process. Frequently, builders are prevented from mitigating these challenges by local zoning and other land use regulations. Fortunately, the Arizona legislature recently formed a housing supply study committee to look at needed policy and regulatory reforms to make housing in Arizona more affordable.”
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