Phoenix is closer to winning the war on inflation than most other cities. And its recent experience confirms what economists and the Federal Reserve have insisted for months but struggled to nail down a precise timeline: When incomes fall, overall inflation generally also declines.
Consumer prices in Phoenix have increased 2.6% from April 2023 to last month, slower than the national pace of 3.4% or that of any other metropolitan area tracked by the Bureau of Labor Statistics. Inflation in the city maintained below 3% since October last yearfalling to 2.2% in February — just above the Federal Reserve’s 2% target level for the country as a whole.
The slowdown comes in the nation’s fifth-most populous city, less than six months away from a presidential election that could very well be decided in Phoenix’s Maricopa County, where the 2020 vote had a slim margin in favor of President Joe Biden. But while political strategists are keeping an eye on Arizona’s economy, so are economists and nonpartisan central bankers.
“Housing inflation remains my most valuable indicator for the immediate future,” said Austan Goolsbee, president of the Federal Reserve Bank of Chicago said last month.
And in Phoenix, so far, both rents and home sales have cooled over the past year.
‘The worst is over’ of a housing crisis
Average home sale prices in the city increased 5.1% from April 2023 to last month, averaging $450,000, according to Redfin. But this jump occurred in a context of slower sales, with almost 3% fewer homes sold than in the previous 12-month period.
More home sellers also appear to be bowing to asking prices, which were reduced on more than 31% of Phoenix homes in March — well above the national average of nearly 18%, Redfin data shows.
“We’re probably past the worst in terms of this substantial and persistent increase in rents and home prices in Phoenix, and we’ll get back to something that’s more reflective of normal trends,” said Mark Stapp, a real estate broker professor at Phoenix’s WP Carey School of Business. Arizona State University.
Sheryl Bowden, president of Realty Executives in Phoenix, said real estate agents at an industry event she recently attended kept asking each other if they were getting any showings.
“It was pretty much a blank stare from everyone,” Bowden said. “There was a screeching halt,” she said of the home buying market.
The slowdown coincides with fewer people moving in and the expansion of residential construction, which together are also helping to alleviate rent inflation.
The city’s population growth has slowed from an annual rate of 1.6% in 2019 to just 0.4% in 2023, according to a census analysis released Thursday. At the same time, Phoenix is now filled with rental inventory “like we’ve never seen,” said Brent Moser, a principal at Lee & Associates who has worked in commercial real estate in the city for about 25 years. Projects conceived just before and during the pandemic are finally being completed after supply chain issues prevented many of them.
“It’s going to be a painful period of adjustment” for rental agents, Moser said, adding that vacancies at some apartment complexes are as high as 11%, far above the roughly 6% he considers typical in a healthy market.
But that could be good news for renters, who Moser said should expect rent declines of between 2% and 4% over the next year to year and a half.
This does not mean that Phoenix, or Arizona in general, has solved its housing affordability problems. There is an estimated 270,000 unit shortage in the state, with just 26 rentals available for every 100 extremely low-income households, Arizona State University researchers estimated earlier this year.
But progress has helped reduce rents. The average rent for a one-bedroom apartment in Phoenix was $1,300 in April, 7% drop compared to the previous year, according to listing site Zumper, versus just 0.6% nationally over the same period. Meanwhile, Phoenix residents are benefiting annual salary gains average 5%increasing your purchasing power as inflation falls.
Impact of rent on inflation
The slowdown in rents in the metro area has loosened up some of the overall “shelter in place” index, which the BLS uses widely to measure the costs of putting a roof over your head — whether through renting or owning a home. That index rose at an annual rate of 3.5% in Phoenix in April, slower than the 5.5% jump nationally.
Housing costs account for about 36% of the Consumer Price Index – a closely watched indicator of federal inflation – and the index that reflects them is difficult to calculate, in part because the costs of renting and owning a home differ. dramatically.
For one, leasing contracts typically leave lessees resetting their costs every year, increasing what the BLS describe such as the “quite complex” design of its survey to assess housing costs. On the other hand, a homeowner’s mortgage payments may not reflect the market value of their property. As a result, BLS economists use a survey of renters to extrapolate how much a home would bring in rent in a given month, as part of a pool called “owner-equivalent rent,” or REA.
“It’s partly a reflection of: How much would this place rent for if you rented it as a landlord?” said Omair Sharif, founder of research firm Inflation Insights.
For this reason, rental rates – not house prices – have a greater impact on how inflation is measured. So when rent prices fall in an area, so do housing costs and probably overall CPI inflation as well.
In other cities where the local inflation rate is lower than the national average — currently including Houston and Anchorage, Alaska — lower shelter costs have also been a key factor, although metro area numbers can be more volatile overall.
Although the Fed can affect demand by raising interest rates, which indirectly contributes to higher mortgage rates, the central bank cannot build more houses or apartment blocks. It can only look at housing data, much of which offers a delayed snapshot, and factor that into its rate decisions.
“There are a number of places in the economy where there are just delay structures built into the inflation process, and housing is one of them,” Fed Chairman Jerome Powell said on May 1.
These delays, according to Sharif, could last up to a year and a half – meaning that slowdowns in rents in other cities may already be disrupting their local markets, such as in Phoenix, without yet showing up in national data.
“It takes a while,” he said.
This story originally appeared on NBCNews.com read the full story
