Why Phoenix Has the Fastest Growing Home Prices in the U.S.

FPhoenix, Arizona has led in the rise of home prices for 33 consecutive months. The median home in this area’s cost has increased by one-third over the past year. Over the course of two years, it’s up 57%, yanking rental prices with it. The area’s wages are not on the same high speed elevator. They grew only 5.3% between 2000 and 2021. Elliott Pollack from Arizona found that the median property price has increased 216% in this area since 2000. However, it has seen a 48% increase in median income. Pollack estimates that by 2025, only a third of the area’s population will be able to afford to buy a home.

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It’s hard to see why there is so much demand for Phoenix properties. It’s uncomfortably hot for several months a year. The country’s cuisine is still not well-known. The city does not boast sexy employers such as Nike or Amazon, and it isn’t a center for high-paying jobs like finance or tech. As a mid-century city, it’s not a place rich in historic buildings or revered cultural institutions. The defining characteristic of life in Phoenix for many years—apart from the dry heat—has been its affordability.

Clearly, some of the same forces are at play there as everywhere: millennials, the largest generation alive right now, have reached the age where they’d like to buy a home. They’re competing with retirees that the so-called Valley of the Sun has long attracted. These same supply chains snarls are affecting the speed of home building in local areas. The pandemic is making it worse, as remote workers are looking for affordable housing that’s spacious and comfortable.

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However, there are certain forces unique to Phoenix. TIME talked to locals to examine why they think the city named after a bird thats spontaneously combusts has gotten so expensive—and how it feels to be so near the blaze.

The Realtor

Experts say a healthy market for housing is one where there are sufficient homes available for sale so that even if new listings were made, the inventory would last four to six more months. Phoenix is able to supply enough homes for one month. You’d think people who sold homes for a living would be having a heyday. You’d be wrong. “It is not fun. I do not like this market as a realtor,” says Nicole Lorig, who has been a licensed realtor in the area for five years. The rising prices have attracted a surge in interest from institutional investors that has seen local first home buyers getting outbid by all cash offers with incentives for the sellers—like being able to stay in the house a few more months for free—that an individual buyer can’t match.

“As a buyer’s agent, it’s hard to compete with the cash buyer,” Lorig says. “It’s definitely more feasible if you’re a listing agent because you’re just waiting for all the offers, but there’s a lot of phone calls to answer. So it’s been difficult for everybody.”

Lorig works also in rental properties, where it has been a long and difficult process. “You just hear the stories of many people trying to find a rental because of a $600 to $800 increase or because their landlord decided that they wanted to sell,” she says. “So they have to find something new and they’re finding that the deposits alone for rentals is just outrageous.”

Her elderly clients were a couple that had just lost their home. They qualified for a lot of homebuyer assistance but they’re in wheelchairs and need a place close to their medical appointments. Their story was picked up by a local TV station and they set up a GoFundMe to raise enough funds to purchase a home. They finally reached an agreement with their landlords to get a lower rent in exchange for other concessions. It was a slow process. “This is going to buy us some time to find a new home for them that they won’t have to move from again,” says Lorig.

The Buyer

Dirk Larson, his wife and their two children moved to the Pacific Northwest eight years ago. To ensure that the move would be permanent, they decided to wait to buy a house. Now the home they’ve been renting is being sold for more than double what the owners paid seven years ago, and the family has been looking for a place to buy for six months. The family has made numerous same-day deals that exceeded the asking price but were still short tens and thousands of dollars. Larson is very frustrated. “People are paying so much more than these houses are worth,” he says. “For somebody like us, wanting to buy a home and or have a little American dream— it’s made it impossible.”

Larsons have been homebuyers before. To find sunshine and more breathing space, they sold their house to move to the southwest. They weren’t the only ones. Since 2000, the Phoenix metropolitan area has experienced a rapid growth of around 20% per decade. Recent growth in Maricopa County has been faster than expected. According to estimates, there were 291 new residents per day in 2020. One of the reasons they moved there—so they could have a yard and some space in a city where more than two thirds of homes are single family dwellings—is also one of the reasons it’s suffering such a housing shortage.

While the city’s population has increased by 11%, its number of residence units has only grown 11%. Larson families, which say they’ll move anyplace within 25 miles of Phoenix Valley, face a lack of choices. “I’ve got a good solid quality job and I’m feeding my family and I’m making good money and we put roots down here,” says Larson. “I don’t want to be forced out. There’s a lot of people who feel they are being forced out.”

The Business Professor

You can trace Phoenix’s current situation all the way back to the Great Recession, according Mark Stapp, a professor in real estate at Arizona State University’s business school. A lot of investors lost a lot of money in Phoenix during the 2008 crash, and although Arizona is a non-judicial foreclosure state—which means landlords don’t have to go to court to evict non-paying renters—so the region recovered quite fast, investors, lenders and builders were spooked and the money stayed away. “We spent five years under-building,” he says.

The crash also inspired the city’s efforts to diversify its economic base. It was a success. Taiwan Semiconductor Manufacturing Company has built a huge factory in the area. A report by the Greater Phoenix Chamber Foundation shows that the number and quality of transport jobs have increased 88% over the past 10 years and nearly 50% for technical and scientific jobs.

“There’s a an incredible amount of industrial and advanced manufacturing, distribution, warehousing space, that’s being built in Metro Phoenix—more than any time in its history,” says Stapp. This infrastructure is great for jobs but takes up a lot of resources. “All of those things consume concrete, steel and other materials that are shared by home building—both apartment and single family—so there’s a competition for those scarce resources.”

According to Stapp, the supply decreased even further after the pandemic. “All you had to do was pump the brakes [on construction] for six or eight months and it caused a couple of years of setbacks,” he says. “It’s like traffic on the freeway. It suddenly swerves because of one driver who hit the brakes. So that exacerbated matters.” The work-from-home measures of the pandemic also brought new workers to Phoenix, looking for larger environs and lower costs. “We used to have this correlation between employment population and housing,” says Stapp. “Work-from-anywhere now caused that to be decoupled.” Since a lot of those people were coming from California, where prices have also boomed, they had more cash to spend on housing.

The industry analyst

Tina Tamboer is an analyst for Cromford Report who analyses real estate data to help investors. This real estate market is not new for her. “We’ve seen many perfect storms,” she says. “This actually isn’t that unusual for us. Maybe not the prices being as high, but we’ve been through bidding wars very similar to these back in 2012.” While she sees “all kinds of players in our marketplace right now,” Tamboer says there are three main types of investor who are driving demand in Phoenix and jostling out the locals by offering higher prices, incentives for sellers and all cash deals.

There are the so-called I-Buyers—businesses like Offerpad or Opendoor that buy homes without the seller having to go to any of the trouble of showings or listings, and then resell them. Both private equity funds and public funds like Invitation Homes can buy and rent out homes. There is also the option to purchase homes as tourist properties. “That’s your Airbnb and your VRBO type investor,” says Tamboer. “Those homes actually are pulled completely out of supply, not available for anyone to live in, only available for tourists. That causes everything else to go up in the surrounding areas as well.”

One local realtor, Rob Olson, says he can’t see how local buyers can compete. “Of the last two homes I’ve sold, one was to a hedge fund and one was to a big rental company,” he says. “They came in with cash. When you’re paying cash, you have to offer a proof of funds—I’m getting proof of funds with $20 million dollars in that fund.”

Tamboer doesn’t believe in Wall Street types. “Personally, I don’t care for corporate ownership of housing. I don’t care for Wall Street hedge funds owning residential homes. What would happen if they bought up all of our inventory?” she says. Moreover, she worries that bankers don’t have enough skin in the game. “Whenever Wall Street investment gets involved into housing, things get riskier,” she says, “because Wall Street doesn’t spend their own money.”

The Activist

While the normal push and pull of supply and demand and the amplification effects of the pandemic is affecting many places, Phoenix’s single-family-home obsession is exacerbating its situation, says Alison Cook Davis, the Associate Director for Research at the Morrison Institute for Public Policy. “It takes a lot longer to build one home at a time,” she says. To solve Phoenix’s housing crisis, she estimates Phoenix will need approximately 250,000 additional residences. “To do that, we would really need to shift our concentration into higher density housing, that would allow us to create more units in a smaller amount of time.”

Phoenix, like many other areas, has exclusionaryzoning laws which make it difficult for developers to construct multifamily homes. But, says Cook-Davis, who co-authored the Institute’s recently released report on what was holding back affordable homebuilding in the state, that’s not the only barrier. “The Private Property Rights Protection Act, which seems to be somewhat unique to Arizona, is a voter-passed initiative that basically says that municipalities are unable to make any changes to land use policy that would adversely impact property valuation,” she says.

Local governments who want to modify their zoning rules to increase density have been held back by the 2006 law. “It’s a law that is very well known to developers, in that they have to get the buy-in of a community before they make any changes, especially to things like density,” says Cook Davis.

Ten years and a quarter later, the legislation might be contributing significantly to the shortage of housing in this historically less expensive city. It may also have other effects that go beyond what was intended. Cook-Davis is also studying the rental market. She says that renters are reporting increasing financial requirements for leases as well as hurdles far beyond money. “The rental market is so tight, landlords, can be so picky,” she says. “Some individuals even talked about feeling like they were getting asked really personal questions and things that just wouldn’t ever have been on an application before.”

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