Phoenix is experiencing a slowdown in inflation compared to the rest of the country, with consumer prices rising only 2.6% from April 2023 to last month, lower than the national average of 3.4%. This decrease can be attributed to a cooling down of rents and home sales in the city, indicating that the overall inflation rate usually mirrors changes in housing costs. The Federal Reserve has been closely monitoring Phoenix’s economy, as the city could play a crucial role in the upcoming presidential election. Federal Reserve Bank of Chicago President Austan Goolsbee emphasized that housing inflation is a key indicator for the city’s economic future.
Median home sale prices in Phoenix have increased by 5.1% from April 2023 to last month, reaching an average of $450,000. However, this rise has been accompanied by slower sales, with nearly 3% fewer homes sold compared to the previous year. The real estate market in Phoenix is showing signs of stabilization, with more sellers willing to negotiate on prices. This indicates a shift towards more normal trends in the housing market. While Phoenix has not completely resolved its housing affordability issues, the easing of rent inflation and increased rental inventory could lead to rent declines of 2-4% over the next year or year and a half.
The cooling down of the housing market in Phoenix has been attributed to a decline in population growth and a slowdown in residential construction. The city’s population growth rate has decreased from 1.6% in 2019 to 0.4% in 2023. Additionally, Phoenix now has an abundance of rental inventory due to the completion of projects that were delayed during the pandemic. This oversupply of rental units has led to vacancies in some apartment complexes reaching as high as 11%, well above the 6% considered typical for a healthy market. While this adjustment period may be challenging for rental agents, it could benefit renters by driving down rental prices.
Despite the progress in lowering rents, Arizona still faces housing affordability issues, with a shortage of about 270,000 units and limited availability for extremely low-income households. However, the decrease in rent inflation in Phoenix has helped alleviate some of the financial burdens on residents, with median rent for a one-bedroom apartment falling by 7% compared to the previous year. Additionally, Phoenix residents have seen annual wage gains averaging 5%, increasing their purchasing power as inflation rates fall. A decrease in the metro area’s shelter index, which measures housing costs, has also contributed to the overall decline in inflation in Phoenix.
The impact of rents on inflation is significant in Phoenix, where reductions in rental prices have led to a slowdown in the city’s shelter index. Shelter costs make up a substantial portion of the Consumer Price Index, which is used to gauge inflation trends. Therefore, when rental prices decrease, overall CPI inflation is likely to follow suit. While the Federal Reserve can influence demand by adjusting interest rates, the central bank cannot directly address housing supply issues. Monitoring housing data, including changes in rental prices, is crucial for the Fed to make informed decisions on interest rates. Lag structures in the inflation process mean that changes in rents may take time to manifest in the national data, highlighting the importance of monitoring local economic indicators like those in Phoenix.
