By Jesse Fisher
As the first weeks of summer 2024 unfold, a series of economic data releases paints a nuanced picture for investors across the United States. These indicators hold particular significance for real estate investors in Arizona, a state whose property market has both benefited from recent economic momentum and wrestled with ongoing affordability concerns. This week, fresh figures on inflation, consumer confidence, and labor trends provide timely signals for those considering investments in residential or commercial real estate markets throughout the Grand Canyon State.
Inflation Continues to Ease, but Not Without Caveats
On Wednesday, the US Bureau of Economic Analysis released updated Personal Consumption Expenditures (PCE) numbers for May, the Federal Reserve’s preferred metric for inflation tracking. The index showed headline PCE inflation cooling to a yearly rate of 2.6 percent, down slightly from 2.7 percent in April. Core PCE, which strips out volatile food and energy prices, fell to 2.6 percent as well, providing a double confirmation that price pressures are continuing to moderate.
For Arizona real estate investors, this drop in inflation has important ramifications. One direct benefit is a potential plateau—or even a reversal—of mortgage rate increases. Over the past two years, the steep rise in interest rates, implemented in response to the post-pandemic inflation surge, has caused monthly mortgage payments to climb significantly. But with inflation trending down, the Federal Reserve is more likely to consider rate cuts during the latter half of the year. Lower rates could rekindle both local and out-of-state buyer interest in Arizona properties, especially in Phoenix and Tucson, where demand had begun to stall as borrowing reached its highest cost in a generation.
However, the news is not unqualifiedly bullish for property investors. While inflation easing tends to correlate with increased buying confidence and transactional activity, persistent high prices for essentials—such as shelter and insurance—remained a note of concern in the new PCE report. In Arizona, these factors have played out acutely. Renters in cities like Mesa and Glendale are still seeing monthly rents outpace wage growth, and rising insurance costs have complicated the investment calculus on fix-and-flip projects, as well as buy-and-hold rental properties. Thus, while falling inflation may give some much-needed breathing room, investors should remain mindful of the uneven distribution of savings across both sectors and regions in Arizona.
Consumer Confidence Inches Higher
Another notable report this week came from the Conference Board, which announced that its Consumer Confidence Index increased modestly in June, reaching 102.0, up from May’s revised figure of 100.0. This return to positive territory follows several months of plateauing sentiment, as Americans have grappled with mixed messages about the economy’s direction.
In Arizona, consumer confidence is a particularly telling measure because migration patterns fuel much of the state’s housing market dynamism. A more confident consumer signals sustained, if not increased, demand for both home purchases and rentals, as in-migration from pricier coastal markets continues. Notably, the Conference Board survey found a distinct uptick in expectations for business conditions and employment six months ahead, aligning with widespread optimism in the Phoenix tech and biomedical sectors. These trends correlate strongly with upward pressure on residential and commercial leasing rates in city centers, as well as continued demand in rapidly growing suburbs such as Queen Creek and Buckeye.
Still, confidence among lower-income households remains notably weaker, owing to persistent concerns about job security and high living costs. For Arizona real estate investors, this bifurcation suggests a careful focus on housing segments that cater to middle- and upper-income migrants is warranted, while more caution is advisable with new builds or flips intended for entry-level buyers who may still struggle with affordability.
Labor Market Holds Steady
Labor data is the third economic indicator that warrants attention this week. The most recent jobless claims report, released Thursday, indicated only a minor increase in initial claims nationwide. The US unemployment rate remains anchored near fifty-year lows, standing at 4.0 percent. While not directly linked to real estate, a robust labor market is typically associated with higher rates of household formation—a leading driver of housing demand.
In the context of Arizona, the employment landscape remains especially favorable. Phoenix added jobs at one of the fastest rates of any major American city last year, driven by growth in education, health services, and professional business sectors. Unemployment in the state ticks below the national average. These factors manifest in a relatively steady stream of would-be homebuyers and renters with secure incomes, supporting both rental market strength and upward price movement for entry- and mid-tier homes.
Yet, it is worth mentioning that sectors such as logistics and hospitality, heavily represented in both Phoenix and Tucson, are more sensitive to macroeconomic shifts. Should labor market conditions deteriorate later this year (perhaps as a lagged response to higher rates or slower national growth), certain segments—especially Class B and C multifamily investments clustered in lower-cost neighborhoods—could experience increased vacancy or downward rent pressure. Thus, while the employment picture remains bright, vigilance is warranted as the year progresses.
Real Estate Activity Picks Up, Inventory Remains Tight
Recent Arizona Multiple Listing Service data demonstrates that the residential market is responding to the economic backdrop noted above. Pending sales in Phoenix rose for the third straight month in May, with median sale prices holding steady after last year’s modest correction. Days on market declined, suggesting rising demand, but transaction volumes remain below the frenzied peaks seen in 2021 and 2022.
At the same time, new listings are not growing fast enough to alleviate chronic inventory shortages. This is especially pronounced in the affordable housing sector, where construction timelines have been disrupted by lagging permits and building material costs that, while retreating from last year’s highs, remain well above pre-pandemic levels. Investors looking for value add opportunities—such as converting older rentals into higher-end properties or pursuing small-scale development in emerging submarkets—may continue to benefit from this supply-demand imbalance.
For commercial real estate, the story is more mixed. High borrowing costs have tempered new investment in office and hospitality projects but are spurring activity in the industrial and logistics space, where proximity to growing distribution networks along Interstate 10 and major transport corridors is seen as a durable advantage.
The Outlook for Arizona Investors
As June closes, the interplay between moderating inflation, resilient job growth, and improving consumer sentiment creates a cautiously optimistic foundation for real estate activity in Arizona. Potential Federal Reserve interest rate cuts later this year—hinted at in economic forecasts and strengthened by the latest data—would likely further reduce headwinds for both buyers and developers, easing the financing squeeze witnessed over the last eighteen months.
Real estate investors should continue to monitor macroeconomic signals closely. The steady improvement in economic indicators does not guarantee uniform opportunity across every market or price point. Metro Phoenix and urban corridors in Tucson are best positioned to see elevated transaction activity stemming from steady demand and favorable migration. Outlying and rural markets, where economic and population growth trends are more subdued, will remain more variable as higher borrowing costs and slower wage growth could dampen enthusiasm.
Ultimately, the message from the latest economic data is one of potential stabilization after a period of volatility, with the Arizona real estate market standing to benefit as inflation recedes and consumer and investor capital grows more confident. Careful analysis, nimble strategy, and a focus on local market fundamentals remain the keys to success in the months ahead.