The Arizona homebuyers' 'Misery Index’ remains at all-high time high, think tank says
Download mp3 (11.2 MB)Arizona’s housing crisis has been well documented over the past several years. And despite Gov. Katie Hobbs’ veto earlier this month of a bill supporters say would have led to more affordable housing, there appear to be continuing efforts at the state Capitol to try to address it.
New quarterly data from a free-market think tank, meanwhile, finds home prices across the state continue to be very high, as is what it dubs the "Misery Index" for homebuyers.
Glenn Farley is director of policy and research at the Common Sense Institute Arizona. He joined The Sow to talk about it.
Interview highlights
How much of all of that is due to supply? We’ve heard for so long that there just isn’t enough housing in the state, either to rent or buy — especially in the affordable, maybe $300,000 range. How much of a role does that play here?
FARLEY: Yeah, it's a good question. The answer is nobody knows. It's a trade-off, like any market, housing market is a trade-off between supply and demand. And we find that when prices go up, two things happen: demand falls, right, becomes unaffordable. People demand less housing, but also supply tends to rise.
And we've seen both of those things occur since about 2022. First, permitting activity — which is a good proxy for how many houses are being built — way, way up since 2022. That tells us developers are responding to the price incentives and trying to build housing. But on the other side of the equation, measuring demand is much more difficult. But a good proxy for that is just how many folks are out looking for homes. And the anecdotal data we get from realtors and equivalent associations is that there are fewer buyers today than there were a couple of years ago.
So, so those two things combined would tell us that it's a mix of both supply and demand response, but prices aren't coming down — and that's perhaps the most complicated part of the question. Why aren't prices coming down?
What are some of the the reasons why that might be happening?
FARLEY: Well, this, you know, is makes sense to me intuitively now, but I hadn't thought about it before. I thought about it. If that makes sense before I started asking the question of why prices aren't coming down. And the answer I think is generally speaking, in a healthy market, most home buyers are also home sellers. So roughly 60% to two-thirds of the homes on the market in a healthy market are gonna be resell homes. That means it's someone selling an existing home and probably buying a replacement home. That's changed. Now, an increasingly large share of the homes on the market are new construction, new construction, of course, means that someone isn't selling anymore. So I think what's happened is you've got fewer home buyers, but also somewhat surprisingly fewer home sellers. The combination of that demand and supply falling at the same time enables the prices to stay elevated at these very high levels.
So that kind of raises the question about first-time homebuyers, because there's been a lot of discussion about people who would like to get into the homeownership market but can't afford to. There is certainly new construction happening, that also seems to be unaffordable for a lot of people.
FARLEY: And that too is a great question, because it leads me to a great point. So, traditionally, historically — and this makes intuitive sense, but I think it's worth thinking about and saying out loud — home builders, home developers build a higher end product. And this again makes an intuitive kind of sense. If you think that two-thirds of the homes on the market are existing homes, used properties, right? The used properties can fill the entry level, lower end of the market, right? And so home developers, home builders naturally are going to lean towards then: What does the seller, the second-time buyer, want? The second-time buyer wants a larger, more expensive newer property, right? And so that's traditionally been true. Home developers have built more expensive properties. We've seen an inversion of that as resale homes have disappeared from the market, developers appear to be responding as quickly as they can — and there are limitations to how quickly they can respond.
But new-build homes, there are more of them today than there were two years ago. The average price of those homes has fallen much more quickly than prices overall. So the prices are falling, they're building more of them. The sizes ... are smaller, the lot sizes are smaller. Other things that are harder to measure, we hear anecdotally are true, like there's fewer amenities, things like that. So developers and builders are trying to build cheaper, more affordable entry-level housing, but there are constraints on their ability to do that.
Let me ask you about some data that you compiled looking at different counties across the state and what their supplies look like and how long it might take to have supply, meet the the necessity of housing. Interestingly, there were a few counties including Pima and Coconino County where the deficit and the the growth is such that — according to your data — they will never close the deficit, at least at the current rate they're going.
FARLEY: Yeah, absolutely. So one of the things we're always asked for is is quantify the deficit. How short are we in terms of housing? Now, we're a free-market think tank. So I struggled with how to do that. Traditionally, when we talk about housing supply deficits as estimated by nonprofits or cities or towns, they do it from kind of a central planning perspective. They look at population, they look at household growth and they try and see how many houses do we need. If we assume that we need ... one house per 2.1 people, or something like that, we tried to avoid that. So we tried to look for a market indicator of housing supply and whether there was a shortfall of surplus. What we coalesced around was vacancy rates. We look at vacancy rates, we identify a healthy vacancy rate and to the extent of jurisdiction counties in our data differ from that healthy vacancy rate. We say we either have a surplus or a shortfall, depending on the direction of the difference. So what we found is generally Arizona has a housing shortfall — has a significant housing shortfall. It's smaller today than it was in 2020 at the peak, but still significant.
But more interestingly, we can then map that to the permit data and say, how long will it take that jurisdiction, given the number of permits is issuing, to close those deficits? And we identified four counties specifically that are on pace never to close the deficits. And the standouts for me are Coconino and Pima county specifically. Pima County is the second largest county in the state, but it's only issuing 5,000 permits a year, for context. There's 75,000 permits per year roughly being issued in the state of Arizona. So Pima County is a very low number of permits. Coconino County contains places like Flagstaff and Sedona, which we've often heard about as struggling with like Airbnbs and things like that. So it's ironic in context to find that those are also jurisdictions that aren't permitting any housing. We know there aren't enough housing units in these places, they aren't permitting new housing to fill those gaps. So that to me was striking about the data.
In Maricopa County, you found of course, the state's biggest county, almost five years at the current rate to have the supply meet that meet the demand.
FARLEY: And in Maricopa County's defense, it's true that it is the state's largest county, but it's also where two-thirds-plus of the state's shareholding permits are being issued. So Maricopa County is one of the more permissive jurisdictions in the state. It appears the jurisdictions there, the cities, are the primary permitting jurisdictions are actually making an attempt. But even there where we have 65,000 to 70,000 permits a year being issued, we're talking five years before we can close this deficit.
