Despite a pandemic, social upheaval and a looming recession, Valley home values rage upward. How long can it keep on?
When realtor Stacie Lee listed a Mesa home this summer, her hopes were not high. From the outside, the property had charm – a pool and a partial view of a lake in the family-friendly Dobson Ranch neighborhood. But the owner had passed away, leaving the interior in shambles, stained with dog urine and crammed with cringeworthy collectibles and 1970s décor. Lee and the estate representative did their best to spiff up the place and put it on the market at $349,000.
The first offer came in before the open house. The prospective owner was eager to buy the property sight unseen, and he put an escalation clause in his contract stating he would pay $1,000 more than the highest competing offer.
At Lee’s suggestion, he came to the open house – along with about 70 other people who paraded through the rooms, sheathed in face masks and slathered with hand sanitizer. Lee received 15 offers that day. She quickly sold the home for $365,000 cash, with the inspection and appraisal waived.
Welcome to the Valley’s 2020 housing market.
Even compared to last year’s bullish market, home values are going through the roof. In August, the median sales price of Maricopa County homes was up 16 percent over the previous year, and in July, one-third of homes sold for more than the asking price, according to the Arizona Regional Multiple Listing Service and the Compton Report. Lee heard of two houses that sold for $100,000 above the listing price.
“Nobody’s ever seen anything like this,” says luxury real estate adviser Dani Lanz.
“It’s a feeding frenzy out there,” says real estate agent Bridgette St. Hilaire.
Yet it’s completely counterintuitive. We’re in the throes of a global pandemic. Racial protests are raging. The West Coast is blazing. The planet is a simmering soup pot of anxiety, upheaval, destruction and disease teetering on the edge of economic collapse. And people are logging on to Zillow? What is going on?
The answer: an unprecedented combination of history, calamity, economy and the unique characteristics of Phoenix. “It’s a perfect storm,” Lee says. “And when it comes to this, we’re not like any other market in the United States.”
To understand the origins of the 2020 housing boom, we have to travel back a decade or so to the Great Recession, explains Mark Stapp, the Fred E. Taylor professor in real estate at Arizona State University. Perversions and corruption in the mortgage lending industry allowed unqualified people to borrow funds used to build homes. This drove demand for new houses, leading Valley developers to overbuild by around 100,000 units. When homeowners defaulted on their loans, the housing bubble burst in 2007. Foreclosures swept across the city. Soon after, large institutional investors purchased single-family homes to rent, thus vacuuming up the excess inventory.
Phoenix homebuilders responded by underbuilding for the next decade. At the same time, multiple large companies moved into the Valley or expanded their operations, encouraged by low property taxes, minimal regulations, shiny new infrastructure, predictable weather and increasingly cool cultural offerings. Maricopa County was the fastest-growing county in the nation three years in a row. As a result, Stapp says, “We were building just barely what we needed. So we went into this public health crisis with a very, very small inventory.”
As we entered the Roaring 2020s, housing prices were rising like Champagne bubbles, and Valley real estate experts were anticipating a buzzing season. Then COVID-19 hit. “And everybody took a collective breath. That first week [in March], everyone was saying, ‘What’s going to happen?’” recalls Lanz, an adviser with Robin Orscheln Luxury Group. “By the second week, the market had exploded.”
The first calls Lanz received were from residents of New York, Chicago, Seattle and Florida. The second wave came from California. Their stories followed similar plotlines: They’d been pondering a move for a while, and the pandemic sealed the deal. They’d flown to the Valley to quarantine in an Airbnb or VRBO while looking for a home. “I think when [cases] started spiking in New York and other dense areas with multifamily housing, people panicked,” Lanz says. “And they started looking at a map.”
Lee, who works with Berkshire Hathaway, noticed a similar trend. “Everybody thought [cities] were going to become vertical, and we weren’t going to do urban sprawl or go to the suburbs any longer. COVID completely changed that. Now, people are trying to move out of the cities.”
Phoenix is, of course, the nation’s fifth largest city. But it’s also low-density and boasts the country’s largest network of urban protected areas – around 200,000 acres of mountainous, lake-strewn desert where it’s easy to hike, bike and boat while staying 6 feet away from other outdoorsy types. This unique cocktail of job growth, diverse entertainment opportunities, open spaces and reasonable cost of living makes the Valley the ideal homestead for pandemic pioneers.
Instead of flattening out, home values have spiked during the pandemic. From March to August alone, the median sales price of metro Phoenix homes rose 7 percent.
Of course, job- and sun-seekers have been moving to the Valley in droves long before COVID-19. But real estate experts have noticed a significant uptick in incomers this year. Both Lanz and Lee say almost all their clients now come from out of state.
Kris Eric Pigman is one such out-of-state refugee. Disenchanted by the “off-the-charts” homeless problem in Northern California and “stifling” regulation, the 50-something real estate developer put his Sacramento-area home on the market this summer and purchased a million-dollar-plus mini-manse in Scottsdale’s Desert Highlands area.
Did he experience any sticker shock, with home prices in Arizona at an all-time high? Not for a second.
“I bought my home here for $200 a square foot and sold my California place for $365 a square foot… and this is no tract home,” he says. “I live on the third hole of a golf course with views of the city. It’s amazing.”
Though retiree snowbirds are still flocking to Phoenix, the main drivers of the current boom are a somewhat younger crowd. “They’re employed, they’re vibrant, they’re joining clubs, they’re coming here for the lifestyle,” Lanz says.
Phoenix is now the 10th most popular city in the United States for millennial homebuyers, who make up the largest portion of homebuyers nationally, according to Forbes. Millennials have predominantly rented in the past, but many have recently been enticed into homeownership by today’s record-low interest rates. The average 30-year fixed mortgage rate is currently around 3 percent. In 2010, the nadir of the recession, the rate was about 5 percent.
The pandemic has provided a further incentive, Stapp says. Thousands of millennials now have young children or want to start a family soon. When cities went into lockdown, many young urbanites suddenly saw a future in which the sounds of Zoom meetings, online elementary school and wailing babies ricocheted around the walls of their cramped apartments. So they popped onto Zillow and searched for places with a backyard and a home office – a room that’s quickly looking less like a luxury than a lifeline. But they also wanted to be near craft beer bars, coffee shops and live music scenes.
That’s why suburban communities with pint-size downtowns – such as Gilbert – are so attractive now, Stapp says. “They have a defined character and some of the [amenities] you might get in downtown areas of major cities. But you can go with the kids in tow, you can bike to them, and you can more easily socially distance.”
Across the country, people are fleeing to the safe arms of suburbia. In the early summer, the least dense ZIP codes, both in metro Phoenix and the nation, grew at almost twice the rate of the densest areas, according to the American Enterprise Institute.
Some local and national real estate experts think one reason is the protests for racial justice that have roiled around the country, including in typically tranquil Portland and Seattle. Just as polar vortexes make Phoenix look irresistibly balmy in winter, this summer’s storms of tear gas and projectiles made the Valley seem refreshingly chill by comparison, Stapp notes. The Western wildfires that sparked evacuations and turned the sky apocalyptic orange may motivate even more people to seek sanctuary in the Sonoran Desert.
The exodus to places where the livin’ is easy has been reinforced by the shift to remote work due to the pandemic. A few companies are allowing employees to work from home permanently. And some people are reinventing themselves as freelancers or entrepreneurs.
“People may be able to say, ‘If I’m going to work remote, I can live wherever I want. So let’s go to Scottsdale, where it’s 70 degrees in winter,’” says St. Hilaire, a real estate agent with HomeSmart. Meanwhile, she adds, locals who were renting because they expected to have to move for work may decide to stay and purchase a house.
The Valley’s reasonable cost of living is a major incentive for everyone from remote workers to retirees. Lee, who recently moved to booming Sun City Festival, says many of her 2020 clients are baby boomers lured by low property taxes and inexpensive heating bills that allow them to get more bang for their savings and Social Security. Many boomers from more costly cities have so much equity in their homes that “they can come here, buy a house for cash, put some extra money in the bank, have a nice retirement and not have to worry about snow, rain and traffic,” Lee says.
However, the fact that Silicon Valley escapees and New York retirees are selling their exorbitant pads and plunking down cash for a comparatively inexpensive Phoenix home (or buying a second home to rent out on Airbnb, says St. Hilaire) means that people of more modest means are getting edged out.
Inventory of for-sale homes in Greater Phoenix has dropped more than 30 percent since hitting a three-year peak in 2019, inflating record home prices.
Lanz says the average Arcadia home is selling for $3.5 million, and many mansions never see the open market but are sold behind closed doors through in-the-know agents. Lee is working with first-time homebuyers who have to look at houses at least $25,000 under their budget because they know a bidding war will jack up the cost. And many millennials trying to step onto the property ladder can’t compete with cash-flush buyers.
Stapp is concerned that this widening inequality will hurt workers in service industries who have been hit hard by the pandemic. “The dark side of all this tremendous demand and rising prices is increases in evictions, foreclosures and homelessness, and declining affordability,” he warns. “I worry that we’re going to see increasing economic fallout affect the marketplace. But because our inventory is so low, I don’t think it’s going to diminish the price appreciation by much.”
In September, the Federal Reserve pledged to keep interest rates at rock bottom for years. But that’s a blessing and a curse, Stapp says. With home prices escalating, many current owners figure that if they sell at profit, they’ll just have to overpay for another house. So they may decide to stay and refinance, plus avoid potentially virus-infected viewers traipsing through their kitchen. Hence, low interest rates simultaneously spike demand and tighten supply.
The Valley’s meager inventory means 2020’s housing boom is not a bubble, and prices aren’t going to ease up anytime soon, according to all the real estate experts interviewed for this story. “I wish we could build our way out of this,” Stapp says. “I just don’t think you can build that many homes that fast.” Plus, he adds, with the cost of construction materials currently rising, fewer homes will be built, and they won’t be cheap.
The only thing that could turn the tide is a decline in demand due to an economic crisis or some other bizarre bombshell 2020 drops on us. But barring, say, shark-infested tornadoes, it seems that seekers of sun, serenity, open spaces, city amenities and still-reasonable prices will continue to converge on Phoenix.