Home price surge likely to follow construction freeze in Phoenix

Government models say Phoenix's groundwater supply is drying up. Homebuyers will have to pay the price to fix it.

The Arizona Department of Water Resources announced June 2 that the state will no longer authorize developers to build outside municipal water sources with a supply of only groundwater. Developers and real estate agents alike say this will hike up already high home prices.

"We'll have significant supply issues post this announcement," Spencer Kamps, vice president of legislative affairs for the Home Builders Association of Arizona, said. "And that will significantly impact affordability."

Phoenix is one of Arizona's five Active Management Areas, regions regulated by the 1980 Arizona Groundwater Management Code. In AMAs, developers of subdivisions must have a 100-year Assured Water Supply, which means their water source can meet the area's anticipated water needs for 100 years.

There are two ways to get an AWS. Developers can either get a commitment of water service from a designated provider — a municipal water supplier approved by the ADWR — or they can get a certificate of AWS from the department itself.

Developers building on the outskirts of Phoenix where designated providers don't reach must now use the second option. The wells they would previously tap in that area no longer hold a sufficient supply of water to meet the 100-year test based on ADWR modeling.

The ADWR's Phoenix AMA groundwater availability model predicted 4.86 million acre-feet of unmet demand for groundwater supplies over the next 100 years. One acre-foot of water supplies three Phoenix homes with water for a year, ADWR says. The department hopes to alleviate this strain by prohibiting new groundwater-based AWS certificates.

But there are 80,000 undeveloped lots already approved with the certificates according to Kamps. They're not impacted by the decision, so that development will continue as normal. Trouble begins, though, when builders run out of these lots. Until they find an alternative water source, they can only build within the reach of designated providers. 

"Essentially, we have a growth boundary," Kamps said. "The land opportunity in those designated providers is finite — it will eventually end."

Maricopa County, which includes Phoenix and its suburbs, has grown by 19% from 2010 to 2022 according to U.S. census data. The median residential home price has increased 240% over that time, from $135,000 in 2010 to $459,000 this year, according to the Arizona Regional Multiple Listing Service. Prices have been on a steep incline since the start of 2020, when the median price was $300,000. In just two years, it rose by 53%.

Sheryl Bowden, president-elect of the Phoenix Board of Realtors, said the local market was already struggling with high interest rates and low inventory. Maricopa County had a housing shortfall of 44,181 units in 2022, Common Sense Institute Arizona says.

"You have people that aren't selling properties because they don't know where they're going to go," she said.

The average 30-year fixed mortgage rate was 6.67% on June 22 according to the The Fannie Mae Primary Mortgage Market Survey. Bowden pointed to relatively high rates, up from 5.81% in the same week last year, as a reason for the shortage: homebuyers are "not going to sell their 3% mortgage on the existing house to go out and get a 7 or 7.5% mortgage," she said. 

Mortgage rates hit a historic low of 2.65% in January 2021. Bowden thinks homeowners are waiting for rates to reach similar levels again before they sell.

"I don't know if that's ever going to be sustainable," she said. "People need to get comfortable knowing that these rates that we're having are, if you go back historically, they're not that bad."

Bowden and Kamps both said the announcement would disproportionately affect development in quickly growing Phoenix suburbs like Buckeye, which has doubled in population since 2010, and Queen Creek, which has almost tripled. 

"The designated providers are much more expensive to build in," Kamps said. "Buckeye specifically is one of the most affordable markets in the Phoenix metro area. And if you take the opportunity to go build in those communities, that's going to impact affordability."

Both communities are searching for alternatives to groundwater so developers can keep building. 

Queen Creek's water resource director, Paul Gardner, said his town has been acquiring renewable water sources to supplement current and future groundwater pumping for years now: "We decided as a community that we had grown so large that we could control our own destiny," he said.

Gardner said treated wastewater, called recovered treated effluent, makes up 20% of the town's water portfolio. In the future, it'll make up 35%.

Developing renewable supplies will increase housing prices in Queen Creek. How much, Gardner said, depends on which supply the city marries each future developer with. Garder said it might mean $5,000 or even $10,000 more per house.

"The cost will be the cost," he said.

The city of Buckeye also assured residents their water future is secure, listing several changes they've made to their water management process. They called the ADWR's announcement a "reactionary response to an exaggerated issue," criticizing the GMA as outdated.

Kamps also called for changes to the GMA, since it only impacts subdivisions, developments of six lots or more. Other developments, like commercial and apartment buildings, don't have to obtain an AWS before building.

Arizona Governor Katie Hobbs created the Governor's Water Policy Council on Jan. 9 to do just that. The council's first meeting was May 17. Kamps is an appointed member of the council.

If the GMA is not updated, Kamps said, "in the future, we won't make any decisions based on efficiency. We'll make decisions based on where the water is."