What the Rise of Phoenix’s Housing Says About the U.S. Economy

Article originally posted on Wall Street Journal on November 30, 2016.

Phoenix’s battle-scarred housing market is expected to be the strongest in the country in 2017, another sign that the U.S. housing market is returning to full strength.

The rapid rise of a market that housing analysts once thought might not recover for decades demonstrates the strength of the national recovery, as home prices this week hit a new record.

Jonathan Smoke, chief economist at Realtor.com, also said that Phoenix’s rebound—much like the national recovery overall—is based on solid fundamentals and there are few reasons to fear another bubble.

The once-hot, then ice-cold desert metropolitan housing market that includes Phoenix, Scottsdale and Mesa, Ariz., is expected to lead the country in a combination of sales activity and price growth, according to Realtor.com, a real-estate listing website.

Phoenix home prices are expected to grow by nearly 6%, while sales could grow by more than 7%, Mr. Smoke said. The forces driving demand are a booming high-tech economy that is attracting younger residents, as well as retirees.

Of course, the last time Phoenix was one of the hottest markets in the country was at the height of a historic housing bubble. But this time, Mr. Smoke said, the area is also suffering from a housing shortage, a dramatic reversal from the boom years when Phoenix was famous for suburbs lined with empty homes put up by speculative developers.

Prices doubled in Phoenix during the housing boom, peaking at a median price of $260,000 in June 2006. Prices are still about 12% off that peak. Through August of this year they have risen by 6% compared with the same period last year. Sales have grown 5% during that time.

Indeed, Mr. Smoke said, overall the national housing market will continue to improve, although the gains are expected to moderate.

Home prices are expected to grow 3.9% next year and existing home sales are forecasted to grow 1.9% to 5.46 million homes, according to Mr. Smoke. Existing home sales this October rose to a seasonally adjusted annual rate of 5.6 million, according to the National Association of Realtors. The median price of an existing home rose 6%.

New-home construction will pick up by 3%, he predicted.

“This is the best year in a decade. Next year will be even better,” Mr. Smoke said.

He also anticipates growth in demand from first-time buyers, though rising mortgage rates could dampen affordability.

The Midwest in particular is expected to be a hot spot for home-buying millennials.

Midwestern cities are expected to outdo the national average share of young people buying homes, with Madison, Wis., Columbus, Ohio, Minneapolis, Des Moines, Iowa, and Omaha, Neb., leading the pack.

In 2016, millennials made up as much as half of buyers in a handful of top Midwestern markets, far higher than the U.S. average of 38%, according to Realtor.com.

That doesn’t mean millennials are necessarily moving to the Midwest in droves. It is more likely that those who already live there are able to buy a home much earlier than their counterparts living in pricey coastal cities.

News Corp., owner of The Wall Street Journal, also operates Realtor.com under license from the National Association of Realtors