Inflation is scorching in once-affordable Phoenix. And rising gas, food prices are not to blame

Ashlee Eisenstein, 49, a waitress at 5& Diner in Phoenix, Arizona said it's become more common for customers to stiff her in tips. The city is facing the highest inflation rate across all major U.S. cities the Bureau of Labor Statistics studies in its monthly Consumer Price Index report.

Ashlee Eisenstein’s landlord recently increased the rent on her one-bedroom apartment in Phoenix from $850 a month to $1,150, a 26% increase.  

She barely entertained the idea of looking for a new place outside of Phoenix, where rents are averaging $1,911 as of April, according to Zillow. That’s 27% higher than what they were two years ago. 

“There are other areas outside of Phoenix that are maybe cheaper in rent, but I mean, I'd be paying that much more in gas just to get to work,” said Eisenstein, 49, who is a waitress at 5& Diner in Phoenix.  

Her situation is a sign of the times in Phoenix, which saw the second-biggest jump in inflation, 11%, amongst the 23 major cities the Bureau of Labor Statistics tracks. That’s nearly 3 percentage points higher than the annual rate of inflation in the U.S. as measured by the Consumer Price Index.  

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Ashlee Eisenstein, 49, of Phoenix, Arizona (left) takes an order from Jennifer Rivera, 35, of New York (right)  at the 5 & Diner in Phoenix, Arizona.

While the regional and national numbers are not an exact comparison, they do show the burden of inflation is elevated in Phoenix.

“It's not unusual for inflation to run a little bit hotter in Phoenix than the U.S., but what is unusual is the degree to which we're beating the national average,” said George Hammond, an economist at the University of Arizona in Tucson.

What's driving inflation in Phoenix? It boils down to housing prices, experts told USA TODAY. 

Why are Phoenix homes so expensive?

Until March, Phoenix experienced the most rapid monthly growth in home prices for the past three years, according to the S&P CoreLogic Case-Shiller Index. From March 2021 to March 2022, Phoenix home prices increased by more than 32%, making it the second-largest year-over-year change, behind Tampa, which saw prices increase by 34%.  

Before the pandemic, 68% of homes sold in Greater Phoenix were affordable to families making the median income of $78,800 a year, according to data from The National Association of Home Builders/Wells Fargo Housing Opportunity Index.

By the first quarter of this year, nearly 44% of homes sold were affordable to families making the median income of $88,800. That's a 35% decline in housing affordability.

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Nationally, some 56% of homes sold in the first quarter were affordable to families making the median income of $90,000. 

These data points help explain why April’s CPI shelter index for Phoenix, a measure of how much people rent their homes for or would pay if they didn’t own it, increased by 14.8% from March. The national CPI shelter index increased by 5.5% in May. 

“If all other costs (transportation, food, apparel, etc) stayed fixed and unchanged the housing component alone would yield about a 7% increase in the overall CPI in Phoenix,” Amar Mann, a regional economist at the Bureau of Labor who oversees research about Western states, said in an emailed response.

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Although wages and salaries aren’t keeping up with the rate of inflation in Phoenix, they grew by 6.4% in March compared with the previous March, according to data from the BLS’ Employment Cost Index. That’s the highest wage and salary increase across the 15 metropolitan areas the BLS tracks for the ECI. Nationally, wages and salaries grew by 4.7% in March compared with a year prior.   

But Eisenstein said she hasn’t received raises beyond increases in the minimum wage. She earns $9.80 an hour plus $300 in tips that are paid biweekly.

To afford the rent increase, she’s cutting back her spending on coffee and streaming services.

“I have to be a lot more frugal,” she said. 

Kevin Gelispie, who runs a Patreon page called “Fetti Talk on Steroids” aimed at providing financial advice to young adults, considers himself “blessed” to have a 3% fixed-rate mortgage for the home he and his wife own in Chandler, Arizona, a city just outside of Phoenix. He pays a monthly $2,700 mortgage payment, compared with the typical monthly payment of $2,000 Phoenix residents pay.  

Currently, homebuyers are paying more than 5.46% on a 30-year fixed mortgage payment on average, according to data from Bankrate. 

Kevin Gelispie, 38, of Chandler, Arizona said most of his friends who live in Phoenix can't afford their rent increases. He purchases his home, pictured, six years ago. Since then housing prices have skyrocketed

Gelispie, 38, moved to Chandler six years ago, when typical home prices in the Phoenix region were below $230,000. Since then, prices have climbed to over $466,000, a more than 100% increase from 2016, according to data from Zillow. 

Most of his friends living in Phoenix are paying “anywhere between $300 to $1,000 more in rent per month than they did last year,” he said.  

Why are so many Californians moving to Phoenix?

Before the pandemic, Americans mainly located in San Francisco and other parts of Southern California were being priced out of homes and began moving to Phoenix, where the cost of living was significantly cheaper, said Adam Kamins, a senior economist at Moody's Analytics.

Individual businesses also caught on to the trend and moved to Phoenix “where costs were lower and the weather is nice compared to other parts of the country.” 

As the pandemic accelerated the shift to working from home, Americans living in Los Angeles, the least affordable city in the U.S., experienced the second-greatest population loss of any major city in the U.S. in the first quarter of this year, according to data published by Redfin. San Francisco was No. 1.

The shift to Phoenix from cities such as Seattle, Los Angeles, and San Francisco is occurring in part because people realized they could save money if they could keep the same job and salary, said Taylor Marr, deputy chief economist at Redfin in a report published last month. 

Although new homes are being built in Phoenix to meet the heightened demand, they're costing more in part because of building material expenses increasing

“Because so many other people are using the same strategy, prices of homes and other goods and services in popular destinations are going way up and inflation is more tame in the places people are leaving.” 

Also, the increased cost of labor and homebuilding materials such as lumber have directly fed into home price growth in Phoenix, said the University of Arizona’s Hammond, who also directs the Economic and Business Research Center in the Eller College of Management. Even as building permits in Phoenix are hovering at the highest levels since 2006 to meet the unprecedented housing demand, “those homes are going to be coming online at higher price points than they were before the pandemic,” he said. 

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Dylan Bucknavich, a self-employed home inspector in the Phoenix area, said that during the latest housing market frenzy in March and April, homebuyers were paying 20 to 30% above the asking price. His business suffered because so many buyers waived home inspections, he said.  

Even though he’s not a contractor, of the handful of inspection jobs he got during that period, a common question he’d receive was “’ How much will it cost to fix this?’” said Bucknavich, 45.

“I can’t answer that anymore," he said. "(Inflation) took my ability away to really help people further as far as setting their expectations on the house they're buying.” 

The bidding wars calmed as interest rates rose, making mortgages less affordable, he told USA TODAY. As a result, fewer homebuyers were forgoing inspections.

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Like Gelispie, Bucknavich also got lucky with his housing situation. He signed a rent-to-own agreement about two years ago with a purchase price of $425,000 for the home he, his wife, and their two children live in. They bought the home six months ago. But had he not signed the rent-to-own agreement, his home would have been listed for upward of $560,000, he said, based on its recently appraised value.  

“If I had to start now, I don't know if we'd be able to buy the home we live in,” he said. 

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“Arizona is the only state with a greater than 50% chance of going into recession by next spring,” Kamins wrote in a May report for Moody’s. “This reflects a somewhat overvalued housing market, but one in which prices are starting to level off along with job growth.”

The city's housing market is "starting to feel a bit bubbly," he said.  "If consumers and homebuyers pulled out very quickly, you could see home price growth not just decline but a small-scale version of what happened in 2008.” 

Gelispie, who also founded Building Back the Community Foundation, a nonprofit that assists victims of natural disasters nationally and people experiencing severe financial hardships primarily in Arizona, said donations have “drastically gone down” even as demand for their services has skyrocketed:   “I’ve been personally taking money out of my own pocket to help people, who are at the end of the day, getting the brunt of inflation.” 

More than 5,000 people were homeless in the Phoenix metropolitan area as of January, according to a point-in-time count conducted by volunteers and submitted to the U.S. Department of Housing and Urban development. That's up 33% from before the pandemic.

“Phoenix's downtown is starting to develop an area similar to Skid Row in Los Angeles," Gelispie said. "Those are the people that we try to help."

Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here