Housing affordability is collapsing rapidly in Arizona due to a general lack of inventory, rapidly rising prices and rising interest rates, according to a new report.
Economists from the Common Sense Institute Arizona (CSI), a nonprofit research organization specializing in issues related to economic development, found that Arizona’s housing market is teetering on the brink.
According to CSI Arizona, housing has become less affordable due to rapid price increases and rapid interest rate hikes. And the problem is more severe in Arizona and the Phoenix metro market; Home prices in Arizona are up 40% versus 25% nationally since the end of 2020.
The report also points out that Arizona’s housing shortage is also hurting affordable housing. The results suggest that the housing peak of 2006, followed by the recession of 2008-2009, caused fewer homes to be built over the past decade.
“Simply put, the demand is outstripping the supply and people are paying more because of it,” said Glenn Farley, director of policy and research at CSI Arizona. “Low borrowing costs have allowed this for months, but it is now coming to an end.”
Additionally, Arizona’s population growth is outstripping the number of available homes. Therefore, Arizona has an imbalance between supply and demand. Today alone, three hundred more people will settle in the valley. Currently, Arizona is poised to welcome over 100,000 people at a time when few homes are for sale and rental occupancy is at 98%.
CSI reports that Arizona is on the cusp of the biggest home building boom in a decade – which could close Arizona’s housing deficit by 95,000 units within 5 years – it may not survive the weakening US economy and the slowdown in the housing market.
The Central Arizona Home Builders Association (HBACA) supports CSI’s research that “Arizona’s housing market is in the midst of a severe supply-demand imbalance that has caused a rapid rise in prices. For 33 consecutive months, between 2019 and 2022, the Phoenix market has led the nation in home price appreciation. But we have now reached an inflection point with affordability. The combination of significant price increases and rising interest rates is keeping many buyers on the sidelines. »
The CSI Homebuyer Deprivation Index (an economic model defining housing affordability as the normalized sum of interest rates and house prices over time), finds that over the past 30 years , housing affordability in Arizona has been relatively stable. Now, housing costs have jumped since mid-2020 and 30-year rates have skyrocketed.
CSI analysis reveals that between August 2010 and August 2020, the Buyer Misery Index increased by just 0.3%/month. Since then, it has increased by 2.3%/month, more than 7 times faster.
“Housing costs are now arguably the worst they have ever been – double the long-term average today and 31% above its previous peak in 2006,” Farley continued.
Finally, CSI measured housing affordability based on hours worked required by mortgage payments over 30 years. 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 that the rate hike has raised costs, in terms of time worked, to over 65 hours and, at current prices, mortgage rates as high as 8% would raise time costs to over 90 hours.
“Realtors are actively involved in their communities, trying to help our customers find affordable housing,” said Arizona Association of Realtors Association President Gary Nelson. “The Arizona Association of Realtors will continue to be at the table – in partnership with other groups and entities – to try as much as possible to create more affordable housing in Arizona.”
HBACA shares this optimism.
“Manufacturers are working every day to find ways to offer more affordable products. To do so, however, builders must manage rising land costs, material and labor shortages, and lengthy delays in the local permitting and approval process. Often builders are prevented from mitigating these challenges by local zoning and other land use regulations. Fortunately, the Arizona Legislature recently formed a Housing Supply Review Committee to examine the policy and regulatory reforms needed to make housing in Arizona more affordable.