Greater Phoenix Blue Chip

FOR SINGLE FAMILY HOUSING, THERE’S NO EASY WAY OUT

Third Quarter, 2025

Elliott D. Pollack & Company

When it comes to housing, affordability is the main issue for most buyers. To see how big this issue is right now, look no further than the Fed of Atlanta’s Housing Cost Burden data. It shows the share of local median household income needed to cover a mortgage payment based on an area’s median home price. The index nationally is now at a whopping 47.7% of income. Under 30% is the historic norm. Greater Phoenix is at 47.2% on a median home price of $440,000. In 2019, (pre-covid) the ratio in Phoenix was 27.7%. Thus, in 2019, it took just a little more than a quarter of a household’s income to be able to pay the mortgage on a house. Now, payments are approaching half of the household’s income. Obviously, this prices a very significant number of people out of the single-family housing market. It certainly explains the 27.4% drop in permits in the Greater Phoenix area between August 2024 and August 2025 (the year-to-date data on permits through August is a decline of 22%). Yet, new home closings are down far less (4.8% from a year ago and 2.6% year-to-date in Greater Phoenix). This reflects new homebuilder advantages over existing home sellers because (a) homebuilders are able to sell a home that is up to date with features demanded by the market and (b) their ability to subsidize interest rates on the mortgages of the homes they sell. It also reflects homebuilder desires in terms of how much inventory to hold.

So how do we get out of this mess and go back to a world with more normal affordable ratios? The answer is there is no easy answer. The housing market is trying to adjust but it will not be easy. There are many factors that are causing the problem. A listing of the issues includes:

1. Interest rates (too high).

2. The housing cost burden (too high).

3. The percentage of people who are locked into homes that presently have a mortgage of 4% or less (way too high).

4. Inability to afford a home has caused demographic changes such as delayed marriages and delayed childbearing that have reduced demand.

5. The current slowdown in job creation affecting affordability and ability to qualify for a mortgage.

6. Continued significant increases in municipal impact fees and unnecessarily long delays in the entitlement process and other items controlled by municipal regulations are causing housing prices to go up.

7. Building costs including commodities like lumber, the effect of tariffs, the slowdown in the production of housing-based commodities, higher labor costs due to fewer construction workers and continued supply chain issues are all creating problems.

8. Smaller houses on smaller lots with fewer amenities are becoming a necessity to bring down housing costs and allow first time homebuyers to get into the game – adjustments to zoning ordinances will be needed to allow this.
9. Slowdowns in migration from other states to Arizona and to the U.S. as a whole from other countries continue to affect overall demand.

So, how do we deal with these and other issues? How do we get lower mortgage rates, lower housing prices, create smaller homes on smaller lots with fewer amenities, speed up the entitlement process and lower the cost of government regulation, create more supply, induce more immigration to the state (demand) and again create faith in the American dream?

It is a combination of the above. While there is a lot of leverage in mortgage rates, the only way mortgage rates will come down significantly is if the economy gets considerably weaker. Housing prices will come down only if there is a significant increase in available supply. That is virtually impossible under today’s conditions. Some things are starting to shift, however. The size of a house in 1980 was 1,595 sq. ft.. By 2020 it was 2,100 sq. ft. In 2024 it was back down to 1,790 sq. ft. Smaller houses with fewer amenities on smaller lots are absolutely a necessary part of the mix to make housing affordable again. Interest rates have started to come down, but until the Feds believe that the economy will weaken significantly, they are not likely to drop very much. Once housing becomes more affordable, the strong underlying demographics that currently exist will create significant demand for all types of housing that have been dormant due to affordability issues. As housing becomes more affordable for the average household, faith in the American dream will be restored. There will be more marriages and more kids and more houses and apartments. Again, that is not likely to happen quickly.

Without going into much more depth on these issues, suffice to say that the aberration in mortgage rates is not due to the current levels of mortgage rates. The aberration in mortgage rates occurred from the start of the pandemic to the second half of 2022. Those historically low interest rates caused a significant problem. Consider these facts to see the impact of losing the ability to buy a house: the median age of a homebuyer in 1981 was 31 years old. In 2010 it was 37. It is presently 56 years old. Older people can buy houses because they owned houses before and, therefore, have equity in an existing home and can buy a new house. Younger people who have never owned a house before have not had a chance to build up equity to fund a new house. Many existing homeowners continue to hold mortgages with lower interest rates (this is not to say low interest rates are bad, but would you give up a 3% mortgage if you didn’t have to?). Also, in 2000, first time homebuyers made up 32% of the market. By 2024, first time homebuyers were 38% and in 2025 first time homebuyers were only 24%, despite better demographics. In short, there is neither a quick fix nor an easy way out, because there are so many factors that are historically out of alignment with a strong housing market. An adjustment in several of these factors will be necessary for a return to normalcy. Despite this, new homebuilders are in better shape than existing home sellers and are going to be in a much better position to benefit when the market does come back, as it will.

As for the situation with rental housing, despite a near-term glut, the outlook is considerably better. This will be  discussed next quarter.

GREATER PHOENIX BLUE CHIP: RESIDENTIAL