Phoenix outperforms the rest of the country when it comes to inflation — on paper, anyway

Phoenix is ​​closer to winning the war on inflation than most other cities. Its latest experience confirms what economists and the Fed have insisted on for months, but have struggled to pinpoint a precise timeline: When rents fall, overall inflation usually falls as well.

Consumer prices in Phoenix rose 2.6% from April 2023 to last month, slower than the national pace of 3.4% or any other metro area tracked by the Bureau of Labor Statistics. The city's inflation rate has remained below 3% since October last year, falling to 2.2% in February – just above the Federal Reserve's target level of 2% for the country as a whole.

The slowdown in the nation's fifth-most populous city comes less than six months after a presidential election that could be decided in Phoenix's Maricopa County, where the 2020 vote narrowly fell to President Joe Biden. But while political strategists are closely watching Arizona's economy, nonpartisan economists and central bankers are watching even more closely.

“Housing inflation remains my most valuable indicator in the near future,” Chicago Fed President Austin Goolsbee said last month.

In Phoenix so far, rents and home sales have declined over the past year.

Median home sale prices in the city rose 5.1% from April 2023 to last month, averaging $450,000, according to Redfin. But the jump came amid slowing sales, with about 3% fewer homes sold than in the previous 12-month period.

And more home sellers appear to be giving in on their asking prices as well, which were reduced on more than 31% of Phoenix homes in March — well above the national average of about 18%, Redfin data shows.

“We're likely past the worst of this significant and ongoing increase in rents and home prices in Phoenix, and we'll get back to something that reflects more normal trends,” said Mark Stapp, a real estate expert. Professor at the W. B. Carey College of Business at Arizona State University.

Realtors at a recent industry event she attended kept asking each other if they were getting any offers, said Cheryl Bowden, president of Realty Executives in Phoenix.

“It was pretty much a blank stare from everyone,” Bowden said. “It has come to a screeching halt,” she said of the homebuying market.

This slowdown coincides with fewer people moving in and residential construction expanding, which together help ease rent inflation as well.

The city's population growth fell from an annual rate of 1.6% in 2019 to just 0.4% by 2023, according to a Census analysis released Thursday. Meanwhile, Phoenix is ​​now filled with rental inventory “like we've never seen it before,” said Brent Moser, a principal with Lee & Associates who has worked in commercial real estate in the city for about 25 years. Projects designed just before and during the pandemic were finally completed after supply chain issues put many of them on hold.

“It's going to be a painful adjustment period” for rental agents, Moser said, adding that the vacancy rate in some apartment complexes is as high as 11%, much higher than the 6% he considers typical for a healthy market.

But that could be good news for renters, who Moser said should expect rents to fall 2% to 4% over the next year or year and a half.

This is not to say that Phoenix, or Arizona generally, has solved its housing affordability issues. The state still has a shortage of about 270,000 units, with only 26 rentals available for every 100 very low-income households, researchers from Arizona State University estimated earlier this year.

But progress has helped bring down rents. The median rent for a one-bedroom apartment in Phoenix was $1,300 in April, down 7% from a year earlier, according to listing site Zumper, versus just 0.6% nationally during the same period. Meanwhile, Phoenix residents benefit from annual wage gains averaging 5%, boosting their purchasing power as inflation declines.

The metro area's rental slowdown has taken some steam out of the overall “shelter” index, which the Bureau of Labor Statistics widely uses to measure the costs of putting a roof over one's head — whether by renting or owning a home. That index rose at 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 — the closely watched federal measure of inflation — and it's difficult to calculate an index that reflects them, in part because the costs of rent and homeownership vary so widely.

For one thing, rental agreements typically leave renters to readjust their costs each year, adding to what the BLS describes as the “fairly complex” design of its survey to assess housing costs. On the other hand, a homeowner's mortgage payments may not reflect the market value of his or her property. As a result, economists at the Bureau of Labor Statistics use a survey of renters to extrapolate how much a home will bring in rent in a given month, as part of a group called “owners' equivalent rent,” or OER.

“It's partly a reflection of the question: What would this place rent for if you were to rent it as a homeowner?” Omair Sharif, founder of research firm Inflation Insights, said:

For this reason, rental prices – not house prices – have a greater influence on the way inflation is measured. So when rental prices in an area fall, shelter costs also fall, and overall CPI inflation likely does as well.

In other cities where local inflation is below the national average — currently including Houston and Anchorage, Alaska — a slowdown in shelter costs has also been a major factor, although urban area numbers can be more volatile overall.

While the Fed can influence demand by raising interest rates, which indirectly contribute to higher mortgage rates, the central bank cannot build more homes or apartment complexes. He can only watch housing data, much of which provides a hindsight, and take it into account when making his interest rate decisions.

“There are a number of places in the economy where there are just lagging structures built into the inflation process, and housing is one of them,” Fed Chairman Jerome Powell said on May 1.

According to Sharif, these delays could be as long as a year and a half — meaning that rent slowdowns in other cities may already be disrupting their local markets, as is the case in Phoenix, without yet showing up in national data.

“It takes some time,” he said.