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Will Housing Prices In Phoenix Go Down?

Will Housing Prices In Phoenix Go Down?


Aerial lithograph of Phoenix from 1885

What’s going on in Phoenix? Is it a case of overbuilding?

No other apartment market is decelerating right now at the pace we’re seeing in Phoenix. Which not long ago consistently ranked among the national leaders in rent growth. But a lot has changed so far in 2022. Here are a few stats:

1) Apartment occupancy in Phoenix is at the lowest levels since 2017 at 94.4%. Still a healthy rate, but trending in the wrong direction quickly. Occupancy there is 166 bps below the U.S. average. Moreover, the largest gap since 2014.

2) In July 2021, 56% of Phoenix apartment renters with an expiring lease chose to renew. In July 2022, that number plunged to 47.1% — the lowest rate in the country and the largest YoY, too.

3) In July 2022, Phoenix underperformed the U.S. average for YoY. Effectively asking rent growth for the first time since 2013. Of course, rents are still growing very briskly (11.99%) in Phoenix. However, that’s a big drop from rent growth nearing 27% earlier in 2022. And based on occupancy trends, we’ll likely see continued deceleration.

U.S. Bank Tower & LA’s Office Future

4) Renter incomes for new lease signers have stagnated in Phoenix (holding around $70k/annual) since winter. Even as renter incomes nationally continue to shoot upward.

However, many of these renters tested living & working in the Phoenix market for roughly a year. And it was through the summer which is NOT desirable for most of those that came from coastal / cooler climates of the west. 

The Job market for the talented, hard working 20-30’s in South Florida & Austin is Absolutely Amazing. And so is the social scene for that demographic which Phoenix just cannot compete with. I’ve been doing CRE deals in PHX for 25+ years now. It’s an AMAZING market when it’s affordable and the National economy is screaming with no signs of a slow down, which it was in 2020-2021, but now that has changed rapidly. 

Phoenix is a GREAT market, and the Tech investment in Chandler will keep a good population of younger high paid tech workers transitioning through Phoenix for many years to come, but most in that demographic simply can’t take the Phoenix heat for a long period of time. It’s a very unique and acquired taste to stay there permanently.

A lot fewer California people are moving to Phoenix. Especially as California has removed all Covid restrictions and as Phoenix isn’t as cheap as it once was.  When you look at population growth Phoenix has dramatically slowed down over the past 12 months.  

Markets like Phoenix and Vegas are basically suburbs of Southern California.  So people move to the far suburbs when it’s cheap.  But Phoenix isn’t that cheap anymore at all.

And the new supply in Phoenix is massive!

This is what happens every cycle in Phoenix too.  They over-build because it’s so easy to build there thinking the market is going to go on forever and it crashes hard due to a glut of new supply.  Last cycle it was overbuilding Single family Homes and Retail.  This cycle it will be an overbuilding of Multi-Family units and Industrial.

Or maybe the Covid effect.  People fled to Phoenix, Denver, Texas, Florida, etc. when companies were allowing employees to WFH.  But unlike Denver or Austin – both markets with huge development pipelines. I think the hot climate and the lack of lifestyle amenities, comparatively, especially for the younger demographic, isn’t retaining a large portion of the  people who moved to Phoenix over the last 12-24 months.  Whereas people who moved during Covid are choosing to stay in cities like Denver, Austin, parts of FL, etc.

However, over 94% occupancy is still pretty tight for a Phoenix “adjustment phase” relative to history. As is a double digit rental growth rate. 

What one sees is a precipitous decline in occupancy happening almost simultaneously with the sharp increase in the 30 year mortgage rate AND a more than doubling in Phoenix MSA MLS listings (still below pre-Covid norms) from previously unseen lows. Maybe we are seeing a run on profit taking among homeowners. Creating an opportunity for homeownership among renters that had not been there for several years. At least for those that can stomach the interest rate environment. 

With slowing home price appreciation, I tend to think that we will continue to see a normalizing percentage of move outs for home purchase which was previously at around 25% across the market.

Will Housing prices In Phoenix Go Down?