Phoenix Leads Nation in Inflation — At Least on Paper

Phoenix appears to be making significant strides in combating inflation compared to many other cities. Recent trends in the city's inflation rates align with the assertions of economists and the Federal Reserve, indicating that when rental prices decrease, overall inflation tends to follow suit.

Between April 2023 and last month, consumer prices in Phoenix increased by 2.6%, which is slower than the national pace of 3.4% and lower than any other metro area monitored by the Bureau of Labor Statistics. Since October of the previous year, inflation in Phoenix has consistently remained below 3%, dipping as low as 2.2% in February, just marginally above the Federal Reserve's targeted 2% level for the entire country.

This slowdown in inflation occurs in Phoenix, the fifth-most populous city in the nation, less than six months before a pivotal presidential election, potentially influential in Maricopa County, where the 2020 vote was closely contested in favor of President Joe Biden. While political analysts closely monitor Arizona's economy, economists and nonpartisan central bankers also keep a keen watch.

"Housing inflation remains my most valuable indicator for the immediate future," stated Austan Goolsbee, President of the Federal Reserve Bank of Chicago, last month.

In Phoenix, both rental prices and home sales have exhibited a cooling trend over the past year, indicating positive developments in the local economy's inflationary pressures.

Housing Crunch Appears to be Easing, Says Expert

Despite a 5.1% increase in median home sale prices from April 2023 to last month, reaching an average of $450,000 according to Redfin, this surge occurred alongside a slowdown in sales, with nearly 3% fewer homes sold compared to the previous 12-month period.

Interestingly, more home sellers in Phoenix seem to be lowering their asking prices, with over 31% of homes experiencing price reductions in March, surpassing the national average of nearly 18% as per Redfin data.

Mark Stapp, a real estate professor at Arizona State University’s W.P. Carey School of Business, believes that Phoenix may have passed the peak of its significant and persistent rent and home price increases, returning to more typical trends.

Sheryl Bowden, president of Realty Executives in Phoenix, recounted realtors expressing surprise at the decline in homebuying activity at a recent industry event, indicating a sharp slowdown in the market.

This cooling trend coincides with a decline in population growth and residential construction expansion, contributing to alleviating rent inflation as well.

According to census analysis, Phoenix's annual population growth dropped from 1.6% in 2019 to 0.4% by 2023. Additionally, an influx of rental inventory, unprecedented in Phoenix, is being realized as projects conceived before and during the pandemic are finally completed after facing supply chain challenges.

Brent Moser, a principal at Lee & Associates with extensive experience in Phoenix's commercial real estate, anticipates a period of adjustment for rental agents as vacancies in some apartment complexes reach as high as 11%, exceeding the typical 6% for a healthy market.

Despite ongoing housing affordability challenges, progress has led to a decline in rents. The median rent for a one-bedroom apartment in Phoenix was $1,300 in April, marking a 7% decrease from the previous year, according to Zumper, compared to a marginal 0.6% decline nationally. Additionally, Phoenix residents are benefiting from average annual wage gains of 5%, bolstering their purchasing power amid decreasing inflation.

‍Rental Costs Influence on Inflation

The recent slowdown in rent growth in the Phoenix metro area has contributed to a moderation in its overall "shelter" index, a key component used by the Bureau of Labor Statistics (BLS) to gauge the costs associated with housing, whether through renting or homeownership. In April, this index increased by an annual rate of 3.5% in Phoenix, slower than the national increase of 5.5%.

Shelter costs represent approximately 36% of the Consumer Price Index (CPI), a crucial federal inflation indicator. However, calculating this index is complex due to significant differences between renting and owning homes. To address this complexity, BLS economists use a renters' survey to estimate how much a property would rent for in a given month, termed "owners' equivalent rent" (OER).

Omair Sharif, founder of research firm Inflation Insights, explains that OER reflects what a homeowner's property could fetch in rent if rented out, highlighting the importance of rental rates in inflation measurement rather than home prices. Consequently, when rental prices decline in an area, shelter costs and overall CPI inflation are likely to decrease as well.

Similar trends have been observed in other cities where local inflation rates are lower than the national average, such as Houston and Anchorage, Alaska, with slower shelter costs playing a significant role. However, metro area data can exhibit greater volatility.

While the Federal Reserve can influence demand by adjusting interest rates, it lacks direct control over housing supply. Fed Chair Jerome Powell acknowledged the inherent lags in housing data and its impact on inflation decisions, emphasizing that these effects may take time to manifest.

According to Sharif, these lags can extend up to a year and a half, implying that rent slowdowns observed in other cities, like Phoenix, may already be impacting local markets before becoming evident in national data.

"It takes a while," Sharif remarked, underscoring the gradual nature of these effects.

Source: CNBC