Phoenix seems to be making strides towards winning the battle against inflation compared to other cities. Recent data shows that when rental prices decrease, overall inflation tends to follow suit. In Phoenix, consumer prices rose by 2.6% from April 2023 to last month, which is slower than the national average of 3.4% and lower than any other metro area tracked by the Bureau of Labor Statistics. The city has managed to keep inflation below 3% since October of the previous year, dipping as low as 2.2% in February, slightly above the Federal Reserve’s target of 2% for the entire country.
Federal Reserve Bank of Chicago President Austan Goolsbee emphasized the significance of housing inflation as an indicator for the near future. In Phoenix, both rents and home sales have shown signs of cooling down over the past year. While median home sale prices in the city increased by 5.1% from April 2023 to last month, the number of homes sold decreased by nearly 3% during the same period. Additionally, more home sellers are adjusting their asking prices, with over 31% of Phoenix homes experiencing price cuts in March, surpassing the national average.
Mark Stapp, a real estate professor at Arizona State University, believes that Phoenix is transitioning back to a more stable housing market after the significant price surges in recent years. Sheryl Bowden, the president of Realty Executives in Phoenix, noted a noticeable slowdown in the housing market, with fewer showings and a reduction in homebuying activities. This cooling trend aligns with a decline in population growth and residential construction expansion, contributing to a decrease in rent inflation.
Phoenix is currently experiencing an influx of rental inventory, attributed to the completion of projects that were delayed due to supply chain issues. Brent Moser, a principal at Lee & Associates, predicts a challenging period for rental agents as vacancies in some apartment complexes reach as high as 11%. Despite the oversupply, this situation could lead to rent declines of 2% to 4% over the next year or so, offering relief to renters in the area.
While Phoenix has seen improvements in rent prices and inflation rates, there are ongoing housing affordability issues in Arizona. The state remains approximately 270,000 units short, with only 26 rentals available for every 100 extremely low-income households. Despite the progress made, there is still work to be done to address the housing needs of vulnerable populations in the region.
The slowdown in rent inflation in Phoenix has positively impacted residents, with an average annual wage increase of 5%. This boost in income has given individuals more spending power as inflation rates decline. Additionally, the moderation in rent prices has contributed to a decrease in Phoenix’s overall “shelter” index, which measures the costs associated with housing.
The Bureau of Labor Statistics uses renters’ survey data to estimate the owners’ equivalent rent, a component of the Consumer Price Index that reflects housing costs. Thus, rental rates have a more significant impact on inflation measurement than home prices. As rental prices decrease, shelter costs follow suit, influencing the overall CPI inflation rates in the city and potentially nationally.
The Federal Reserve closely monitors housing data as a key indicator of economic trends, understanding that there are inherent delays in the inflation process, particularly in the housing sector. While the central bank can influence demand through interest rate adjustments, it cannot directly control housing supply. As Phoenix navigates through changes in rent prices and housing market dynamics, the impact on inflation rates and consumer spending will continue to be a focal point of economic analysis and policy decisions.