Phoenix is closer to winning the war on inflation than most other cities. And its recent experience bears out what economists and the Federal Reserve have insisted for months but struggled to pin an accurate timeline on: When rents come down, overall inflation usually does, too.
Consumer prices in Phoenix rose 2.6% from April 2023 to last month, slower than the 3.4% national pace or that of any other metro area tracked by the Bureau of Labor Statistics. Inflation in the city has held beneath 3% since October of last year, falling as low as 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 from a presidential election that could well be decided in Phoenix’s Maricopa County, where the 2020 vote came down to a slim margin in President Joe Biden’s favor. But while political strategists are keeping a close eye on Arizona’s economy, so are economists and nonpartisan central bankers.
“Housing inflation remains my most valuable indicator for the immediate future,” Federal Reserve Bank of Chicago President Austan Goolsbee said last month.
And in Phoenix so far, both rents and home sales have cooled down over the last year.
‘Past the worst’ of a housing crunch
Median home sale prices in the city actually rose 5.1% from April 2023 to last month, averaging $450,000, according to Redfin. But that jump came amid slower sales, with nearly 3% fewer homes sold than in the previous 12-month period.
More home sellers appear to be caving on their asking prices, too, which were slashed on more than 31% of Phoenix homes in March — well above the national average of nearly 18%, the Redfin data shows.
“We are likely past the worst of things in terms of this substantial, persistent increase in rents and home prices in Phoenix, and we are going to be back to something that is more reflective of normal trends,” said Mark Stapp, a real estate professor at Arizona State University’s W.P. Carey School of Business.
Sheryl Bowden, the president of Realty Executives in Phoenix, said realtors 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 everybody,” Bowden said. “It came to a screeching halt,” she said of the homebuying market.
The cooldown coincides with fewer people moving in and expanding residential construction, which together are helping ease rent inflation too.
The city’s population growth declined from an annual rate of 1.6% in 2019 to just 0.4% by 2023, according to a census analysis released Thursday. At the same time, Phoenix is now flush 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 held many of them up.
“It’s going to be a painful period of adjustments” for rental agents, Moser said, adding that vacancies in some apartment complexes are as high as 11%, far above the roughly 6% he considers typical of a healthy market.
But that could be good news for renters, who Moser said should expect to see rent declines of between 2% and 4% over the next year or year and a half.
That doesn’t mean Phoenix, or Arizona at large, has resolved its housing affordability issues. The state remains about 270,000 units short, with only 26 rentals available for every 100 extremely low-income households, Arizona State University researchers estimated earlier this year.
But the progress has helped nudge down rents. Median rent for a one-bedroom Phoenix apartment was $1,300 in April, down 7% from the year before, according to the listing site Zumper, versus just 0.6% nationally over the same period. Meanwhile, Phoenix residents are benefiting from annual wage gains averaging 5%, boosting their spending power as inflation falls.
Rent’s impact on inflation
The metro area’s rent slowdown has let some steam out of its overall “shelter” index, which the BLS broadly uses to measure the costs of putting a roof over one’s head — whether by renting or owning a home. That index rose by an annual rate of 3.5% in Phoenix in April, slower than the 5.5% jump nationally.
Shelter costs make up about 36% of the Consumer Price Index — a closely watched federal inflation gauge — and the index that reflects them is tricky to calculate, partly because the costs of renting and homeownership differ dramatically.
For one thing, leasing agreements typically leave renters resetting their costs every year, adding to what the BLS describes as the “fairly complex” design of its survey for assessing housing costs. For another, a homeowner’s mortgage payments may not reflect their property’s market value. As a result, BLS economists use a renters’ survey to extrapolate how much a home would fetch in rent in a given month, as part of a bucket called “owners’ equivalent rent,” or OER.
“It is in part a reflection of: What would this place rent for if you were to rent it out as a homeowner?” said Omair Sharif, founder of the research firm Inflation Insights.
For that reason, rental rates — rather than home prices — have a bigger impact on the way inflation is measured. So when rental prices fall in an area, so do shelter costs, and likely overall CPI inflation as well.
In other cities where the local inflation rate is lower than the national average — at the moment including Houston and Anchorage, Alaska — slower shelter costs have also been a key factor, though metro area figures can be more volatile in general.
While the Fed can affect demand by raising interest rates, which indirectly contribute to higher mortgage rates, the central bank can’t build more houses or apartment blocks. It can only watch 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 lag structures built into the inflation process, and housing is one of them,” Fed Chair Jerome Powell said on May 1.
Those lags, according to Sharif, can be as long as a year and a half — meaning rent slowdowns in other cities may already be shaking up their local markets, as in Phoenix, without turning up yet in the national data.
“It takes awhile,” he said.
