Phoenix, Arizona
Investors, Homeowners Continue to Bank on The Valley of the Sun
By Carole VanSickle Ellis
Imagine describing the boundaries of your hometown city in this way: “The area is bounded by the shores of Lake Pleasant and the Superstition Mountains.” It sounds like a fairy tale, but the truth is that this description closely matches the boundaries of the Phoenix, Arizona, metropolitan area.
In Phoenix, home values are the stuff of dreams as well, with owners who purchased in 2017 banking 94% appreciation over the last six years. While values probably will not continue to skyrocket in that manner, local analysts predict the Phoenix market will continue to hold strong until the end of 2023 and then, astoundingly, level off rather than “correct” simply because local home values already reflect the taut balance between supply and demand in the area.
“There is not enough housing for the population, [and] people need a place to live,” local broker and Phoenix Board of Realtors president Butch Lieber told the Arizona Digital Free Press in late June. Lieber said he expects home prices will rise throughout the remainder of 2023 in large part because population growth in Phoenix has continued to climb. “We have gone up about 10% in prices so far this year,” he said.
However, while homebuyers are still flocking to the Phoenix area, many investors are backing away — at least from single-family property purchases. During Q1 2023, Redfin reported a 64% drop in investor purchases in Phoenix compared to Q1 2022. Nassau County, New York; Atlanta, Georgia; and Charlotte, North Carolina, were the only cities in the country to post larger declines. With annual sales prices on investment properties also down 9% in Phoenix, investors are likely easing off purchase rates because it is becoming increasingly hard to recoup expenses and make a profit.
Earlier this year, investors reported buying homes for a median price of $400,000, but selling for only about $10,000 more than this. Furthermore, not many owners are choosing to list their homes in the first place. According to the St. Louis Fed, there were just under 8,600 homes for sale in the entire Phoenix metropolitan area in June 2023.
This lack of housing paired with a steadily growing population has resulted in a housing market that is stable despite its recent, meteoric rise. The majority of acquisition activity in the Phoenix area is focused on the sub-$450,000 “sweet spot.” Steven Hensley, senior manager with new-home consulting firm Zonda Advisory, explained, “Ultimately, given the lack of existing resale homes…new homes with favorable specs and financing are selling at a healthy pace, and builders can pull some levers which don’t exist in the resale market.” He noted, however, that consumers “don’t want to wait.”
Beating Pandemic Flight, Hands Down
Although the global COVID-19 pandemic slowed and even reversed urban population growth in 2020 and 2021, Phoenix’s urban growth never stopped. In fact, the area added 66,850 people in 2021 and 72,850 in 2022. These were some of the largest gains for a major city anywhere in the country, and the Phoenix metro area now has more than 5 million residents and could top 7.6 million by 2055.
In other similarly attractive metro locations, would-be homebuyers might find themselves compelled to accept renting simply because the few homes listed on the market are too expensive to buy. In Phoenix, however, many renters are actually losing their rentals as landlords elect to take advantage of rising home prices and sell off rental properties. According to a report in Time magazine, the number of residential rental units in Phoenix has grown but only about 11% over the past decade. By comparison, the local population grew by about 20%. With fewer single-family listings on the market than ever and most new construction focused in the multifamily sector, the competition for single-family homes in Phoenix is likely to grow only more intense.
Solving for the Water Factor
Perhaps one of the only things that could potentially stop the population influx in Phoenix is the statewide groundwater shortage throughout Arizona and the complicated politics and policies surrounding the issue of who gets water and who has water rights. For investors, the issue is even more complicated. It is vitally important to understand how water rights are regulated and where (or if) there is likely to be “queue” for them in the future. The key to solving the “water factor” in Arizona relies on understanding how state and local water policies interact.
More than 50 years ago, 10 Arizona municipalities in Maricopa County, where the majority of the Phoenix metro is located, joined together to secure water resources for their respective areas of the state. The Arizona Municipal Water Users Association (AMWUA), led by executive director Warren Tenney, represents 3.7 million residents, more than half the state’s population, as well as businesses and industries critical to both the state and local economies.
“AMWUA members understand…we live in a desert. We have to manage our water well,” Tenney said. AMWUA members must complete regular reassessments every 10 to 15 years in order to maintain a certified, demonstrable plan for 100 years’ of assured water supply. Currently, all cities have either recently completed this recertification or are in the process of doing so in order to receive their designation for 2025.
“This gives everyone a chance to revisit demand and supply,” Tenney explained. Investors interested in development in the Phoenix area should investigate how their deal fits into the geographic AMWUA certifications.
“It really is the platinum standard in water management,” Tenney said. “All 10 AMWUA cities are well positioned to be able to continue to develop and thrive because they are not solely dependent on groundwater and are able to meet demands of community and local projects over the next 100 years.”
The Grass is Still Greener in the Valley of the Sun
Phoenix is certainly a market filled with contradictions, but one trend seems beyond dispute. The Valley of the Sun housing market is still hot and likely to remain so as long as living in the desert under a semi-permanent drought is more appealing to West Coast buyers than continuing to live in their own over-priced metro areas.
“The Phoenix real estate market is being kept alive by out-of-state buyers,” said John Sposato, a local real estate agent who has been active in the area for more than 20 years. He cited a Redfin report indicating that most Phoenix homebuyers in May 2023 were from Seattle, Los Angeles, San Francisco, and Chicago. He agreed with the findings, explaining, “Companies are coming here and building factories. We have semi-conductors. We have Google. We’ve got Amazon. We have Apple. We have a lot of jobs coming to Phoenix.”
Since 2020, the semiconductor industry has found a home in Phoenix, but the city’s new nickname, “the semiconductor desert,” has been years in community-masterplan making.
In 1955, a Motorola research and development lab based in the city debuted the world’s first commercial, high-power, germanium-based transistor. These transistors were used in the first portable AM radios as well as guitar-effect pedals in the 1960s. The city courted (and won) much of Intel’s chip-manufacturing business more than five decades ago, paving the way for the Taiwan Semiconductor Manufacturing Company (TSMC) and its massive semiconductor fabrication plants and associated jobs today.
Of course, making semiconductors and other electronics requires access to huge volumes of groundwater. Currently, TSMC and other industry facilities rely heavily on water from the Colorado River, which is over-allocated and running at an annual deficit. Intel has successfully implemented water recirculation systems that allow Phoenix-area plants to expand without requiring the city to adjust water requirements. Should other companies successfully do the same, the Semiconductor Desert could become a true mecca for this type of production and manufacturing.
“The economic benefit to the city of Phoenix and the larger tax base…was significant,” said Cynthia Campbell, Phoenix’s water resources manager. She said the state of Arizona continues to view the semiconductor industry as a “game changer.”
For real estate investors, this is just one of many elements combining the make Phoenix a long-
term, bankable location for investing.
SIDEBAR
Watching Out for Water in Phoenix
The AMWUA certification is now more important than ever because some areas of the state, including areas of the extended Phoenix metro, face a building freeze due to changes in water policy. In June 2023, Arizona governor Katie Hobbs announced that the Arizona Department of Water Resources (ADWR) will “no longer approve new housing subdivisions in the Valley [Phoenix metro area] that rely on groundwater.” Historically, developers have been required to show they have access to 100 years’ worth of water for the homes they are building. Most have cited their ability to drill for groundwater as their main access. While most of the municipal area has access to other types of water supplies like river water (also in short supply) and recycled wastewater, the policy will likely have an outsized effect on the western and southeastern edges of the Phoenix metropolitan area. At present, those areas of the city also contain about 75% of new housing being built at this time.
“Those communities now do not have an assured water supply,” said Claude Mattox, vice president of government and community relations at Arizona-based consultancy Molera Alvarez. “Until they identify one, they will not be able to develop.” Investors should note projects that already have approval will be grandfathered in.
“The new groundwater regulations will limit the region’s ability to sprawl outward, which is how we have typically grown our housing stock,” explained Arizona State University (ASU) real estate development professor Mark Stapp. He added, “It is a huge opportunity for us to rethink development patterns.”
