Arizona's overheated market

Transcript

Allie Barefoot: Welcome back to Data and Context. I'm Allie Barefoot with Cotality and we're talking about the Arizona housing market today. A place that's both a real estate magnet and a pressure cooker. Everybody wants talk about interest rates, right? But there's a quieter threat in Arizona, the heat. Extreme temperatures don't just make you sweat. They can hurt your wallet by driving up utility bills, even damaging your home, which can make a property look less attractive. On one side, in Arizona, you have an influx of investment in the real estate market. But on the other side, you have such a brutal heat index that it makes the prospect of living there almost undesirable for many. The two sides seem to be in opposition, but the big question is which side's going to cool off first. So, we're going to break down that data today with Cotality's chief scientist, Howard Botts, and he'll explain how you can invest in Arizona without getting burned. So, let's go on ahead and jump into today's questions. Howard, thank you so much for joining us on Data and Context.

Howard Botts: Well, thank you, Allie. It's a pleasure to be here today.

Allie Barefoot: Absolutely. You actually have a collaborative article right now on the Cotality Insights page that's called Arizona is too hot to touch. And that's kind of what we're diving in here. I think it's super interesting that Arizona is a booming real estate market, but also driving people away at the same time because the heat is just so brutal. So, it's kind of where I want to start this conversation is that, you know, the weather is an extreme factor. So, what should potential home buyers know about the climate and infrastructure risks that could affect their decision to move there?

Howard Botts: Oh, that's a great question. And Arizona is certainly ground zero for the impact of climate change on the housing market. And I guess asking a natural uh risk hazard risk scientist this question may generate sort of a scary sounding answer but uh I think try to give you some realistic kind of facts as to what's going on on the ground. Obviously as you mentioned extreme summer heat uh now and in the future is number one issue facing Arizona. We model uh climate change out to 2050 and we expect temperatures in Arizona to rise significantly. Uh for example, Maricopa County where you find Phoenix or Yuma counties uh a county down on the border with Mexico uh we see extreme heat days increasing 30 to 40% in just 25 years. And for example, uh, Maricopa County, where Phoenix is, will by 2050 have 155 days above 95, 46 above 110, and uh almost 4 days above 120. You know, kind of scary when you think about human life and impacts on on on health.

And that is compounded by a few other risks. Certainly as the environment gets warmer, we tend to consume more water. Uh and water scarcity is a huge issue for Arizona and for home buyers kind of moving into the market and uh across the state really long-term water challenges. All western states have been overallocated. Colorado river water for example uh and uh you know the drought conditions we expect to continue and diminishing groundwater. Uh all of that uh very impactful on homeowners to the point now that the state of Arizona requires certain areas like Phoenix to prove uh if you're a developer you have a 100-year supply of water for your new subdivision. Uh, and as you might guess, uh, that slowed down construction in some areas, but if you're an existing homeowner, I guess, uh, that means increase in your, uh, value of your home.

And I guess two other quick uh you know risks that we worry a lot about at Cotality are wildfire and certainly as it gets drier and hotter uh there are many areas particularly around the urban wildland interface where homes have butt up against the uh natural vegetation areas we see increased wildfire risk and obviously that translates to higher insurance premiums and flooding which I think is kind of counterintuitive to most of us is a desert for the most part, but Arizona does experience intense flash floods, particularly during the monsoon, summer monsoon season. And so, uh, any new buyer should certainly check, uh, what the property's flood risk is. And flood insurance, even if you're outside the 100-year flood zone, is not a bad idea.

Allie Barefoot: No, absolutely not. As we have seen that environmental risks and natural disasters, they really just like to go where they please regardless of what has been typical and atypical to an area. And it's interesting because you mentioned about the water supply, not just as humans, but you know what you need in your property and in your business. So, we know that that can put a bit of damage on your wallet. And beyond water utilities, what part of Arizona's infrastructure, housing, roads, power grids is most vulnerable to the rising heat. What are the long-term effects of that?

Howard Botts: Well, you've definitely identified other major uh things we need to worry about, new homeowners and existing ones should worry about. You know, rising heat has a massive impact on the power grid. And uh you know, recent studies have shown that if Phoenix were to lose power for two days during an extreme uh heat event, half the population or about 800,000 people would require medical attention obviously creating significant financial impacts and uh unfortunately a lot of heat related deaths. Uh so I think you know people worry a lot about uh the the strength and power and resiliency of the Arizona power grid. Uh roads uh you know are particularly vulnerable to uh physical impact of chronic heat uh and we mentioned water earlier.

Many of my friends who've moved to Arizona move there so they can play golf. And a single golf course consumes around 450,000 gallons of water per day. Uh you know, it would be enough to fill 45,000 swimming pools to give you an idea for one golf course. Uh and finally I think maybe we don't focus enough on this issue but uh you know we in the kind of the urban uh built environment world talk a lot about urban heat island effect and uh when you build cities concrete buildings dark rooftops absorb and store heat during the day uh slowly releasing it at night and generating really dangerously high nighttime temperatures. And again, when we talk about the power grid, that means you're unlikely to be able to open your windows and experience a cool night in summer. Uh so all of those are, you know, additional things that go beyond direct heat as an impact on life in Arizona.

Allie Barefoot: We're now in October and that's one of my favorite things about that fall time is getting to lift my windows a little bit, get a nice 60 degree breeze coming in through my window as I sleep. But I understand that, you know, every area is going to have some climate risk, but there's also a lot of benefits to every single area. Like you said, your friends playing golf. You know, my brother is an avid golfer. He's been to Phoenix multiple times on a guy's trip or just loves the golf courses there. It turns out that Cotality found that Phoenix actually ranks number four nationally for investor home purchases. What do you think makes that state so attractive? Despite the golf obviously, but you know, despite the growing conversation around the climate risk, people are moving there. Why is that?

Howard Botts: Yeah, I think you've captured uh a dilemma we see nationally. If you look at where people are migrating to, it tends to be the areas with the highest risk. But there's reasons they go there. And aside from just like we talked about recreational aspects, Arizona is really known for its pro business environment. So it has relatively low taxes, streamlined regulations, and it's really a landlord friendly environment. So all of that boosts investment returns. Uh Phoenix is no longer a retirement and tourist-based economy. Uh really much more robust, a booming job market. It's become a center for advanced manufacturing, technology, healthcare, finance.

And so if you're an investor or an individual, you know, it depends on whether you're looking at your short-term uh goals or really longer term risk. And if you're an investor, you typically operate on a 5 to 10-year horizon and you're not really thinking about necessarily the more far-off kind of climate risks as all of these things we've already talked about become more and more uh extreme. And I think humans in general are really bad at understanding risk. It certainly keeps the lights on in Las Vegas. Uh but you know most of us kind of hope for a better future and I think individuals and investors uh are really betting on adaptations that will figure out ways to uh make uh the climate uh you know whether it's better energy efficient infrastructure or other solutions water recycling desalinization using ocean water. All of which are going to kind of minimize sort of future risk. So I think it's a robust economy to kind of more succinctly answer your question. Uh it's more diverse economy and beyond just sort of snowbirds coming there in the winter. We see a sort of a year-round migration to take advantages of all the things I just mentioned.

Allie Barefoot: And it's not uncommon. Cotality's October home price index report found that the housing market right now is being made up of one-third of investors. So people are investing everywhere. But we have seen obviously Phoenix in the top five area nationally as a home for investors. And you talked a little bit about migration and we know that we're seeing a lot of migration coming from other states such as California. But how does this affect the home prices in Arizona? And what does that mean for first-time buyers who are, you know, priced out and so many other US markets are trying to keep up?

Howard Botts: Yeah, I think uh one of the things that's made uh Arizona attractive is relatively lower home prices compared to California. So, uh, I live in an area, uh, where, uh, recently the Palisades fire came through and many of my neighbors moved to Phoenix and Tucson or Northern Arizona. Uh, and they did so in part because when they sold their house, they uh, got significantly more cash uh, from selling their house than they had to pay for a property in Arizona. So, you know, there's a uh price advantage. Uh and uh it's a plus for Californians, but the flip side of that is, you know, uh many of my friends have paid more than asking price, offered cash, and ability to outbid local buyers.

Uh and you know tens of thousands of new residents moving to Arizona uh with a relatively limited supply of houses for the water reason and others we've talked about uh have definitely caused medium house prices to surge uh in some areas by 50% uh as Selma our chief economist uh has pointed out and uh this is been a challenge I think and may ultimately uh for at least the retirement population slowdown growth. Uh you know for investors like mentioned a minute ago the good news uh is that uh for them that many newcomers want to rent first and uh you know so apartments single family rentals are really soaring and I think we see that in the percentage of investor purchased homes in Phoenix and other areas.

Allie Barefoot: And we know there's always going to be a balance right wherever you live there's going to be a pros category and a cons category. And in your opinion, how do you weigh short-term attractions like sunshine and low taxes in Arizona against long-term threats like you said the climbing heat index and water supply?

Howard Botts: Yeah, I think most of us uh you know think more in terms of short term and uh you know so the lower taxes uh economic diversity uh ability as we talked about people migrating in being able to buy low uh and having high initial equity are all really positives for people in the short term. And uh you know by short term maybe uh now to 5 years from now but if people are thinking about the long term there's certainly going to be impacts. You know it's often easy to buy a house in a higher risk area but more difficult to sell and we're seeing that across the country as well as Arizona. You know time on market uh you know potential reductions in prices in areas that are risky. So I think the longer term threat really is will people begin to move out go to lower cost areas and we're seeing some of that already people moving to adjacent states uh that aren't California uh to lower cost.

Uh, one of the things we haven't talked about, Allie, is really rising uh, energy costs and insurance costs. And, uh, for many individuals over the long term, say a 30-year uh, time horizon on a mortgage, uh, insurance, energy, property taxes will greatly exceed uh, what they thought they had as a fixed cost in their mortgage. So, uh, that's going to erode individuals cash flow. And then of course uh you know the chronic heat, limited water uh may halt economic activity or slow it down. So I think in the short term things look pretty good. In the longer term uh unless we figure out ways to mitigate the many risks we've talked about uh I think it will be impactful on the Arizona economy.

Allie Barefoot: That brings up a great point about the mitigation and you know when everybody tries to budget as we do every month, very few think of the rising costs and what it may take to mitigate your home as Cotality shows that climbing heat indexes can definitely make it a bit pricier to insulate a home. So, how can smart designs, you know, such as tree canopies, reflective surfaces, building orientation, how can that help homeowners mitigate their properties in Arizona?

Howard Botts: Well, you pretty much just answered the question for me. You know, uh we talked a little bit about urban heat island uh earlier and how cities uh you know, absorb heat and slowly give that off at night. So, urban areas are much warmer than their surrounding rural areas. So, you know, some of the mitigation strategies would be uh you know, reflective surfaces, cool roofs and pavement. Uh some cities are actually experimenting with painting their streets white to reflect heat rather than absorb heat. Uh which is kind of an interesting idea. Uh you know as a homeowner uh you know if you have enough water that you can make some plantings uh increasing your tree cover uh particularly on the south and west sides of your building uh or home uh will add shade. Obviously the highest thing uh and usually the highest return on investment is just making sure you have high R-value insulation in your home. Uh but other things like uh high overhangs uh over the south facing windows or awnings all of that uh will help mitigate at least some of the short-term heat issues.

And interestingly, we at Cotality uh as I mentioned before build climate risk models and we look at a lot of the acute uh risks like flooding or uh you know earthquake, wildfire. But lately uh the we've developed a series of what we call chronic risks which include heat, cold, drought and precipitation. Uh of those heat is the one that's gotten the greatest interest and uh you know student housing was one that I hadn't thought of but suddenly we've had a number of Arizona universities reach out to us you know you can't move a university so they need to budget to retrofit older buildings. Uh senior housing uh is another one a lot of the uh real estate investment trusts and other investors that own that are looking for to uh understand heat and where it's going to go. And the one that's probably surprised me the most that's reached out to us are manufacturing and labor unions. You know, really interested on what are the impact on workers. As you might guess, if you're an agricultural worker, uh you know, that impact is significant. Uh but even in factories and some of these other facilities you know figuring out ways to mitigate risk. So although our focus has been on homeowners uh you know this is related uh since people have to pay their bills people are really looking at all the different ways we can mitigate both at the individual structure multifamily housing and in the workplace.

Allie Barefoot: Absolutely. I feel when we talk about natural disasters, it's almost easier to talk about the big ones, the hurricanes, the tornadoes. And while those are obviously detrimental to society, a very quiet threat is heat that a lot of the nation does deal with, you know, whether it's in as a homeowner or as a business owner, it's a quiet threat, but it is big that can be talked about more and how you can help mitigate your property, a bigger property and such. I actually have one more question for you and that is what should the Arizona home buyer today think about what to make sure that their home and the investment that it represents is protected for the future?

Howard Botts: Yeah, I think that's a great question and touches on really the scope of our conversation. Uh, you know, number one, uh, item uh, certainly is to look at the energy efficiency of your home. Uh and make sure you have a high efficiency air conditioning system. Uh you know, even in California, a lot of my neighbors have all put in backup generators these days or uh if they have uh solar panels, they're installing uh battery systems in their houses that will allow them uh during a power outage to maintain the relative uh air conditioning in their home. So that's critical. You know, checking the building itself. Uh you know, what does the insulation look like? Do you have a cool roof uh or other reflective uh surfaces that will reduce uh the heat load on a property? Some of the passive things we've talked about, roof overhangs, sunscreens, mature shade trees, and one that I don't think is as obvious is, you know, during monsoon season, you can get very intense rainfall and you want to make sure that you can drain water away from your foundation and that uh you've done other uh kind of preventative measures to uh make sure that you don't risk your foundation shifting uh and have other sorts of water damage. All of that will hopefully ultimately get you a lower quote on your insurance premium, which uh you know is an issue we're seeing across the United States.

Allie Barefoot: You know, I live in Texas, which is not nearly as hot as Arizona, but we have some hot days. And now I'm going to be considering uh painting my driveway white just to at least get some kind of mitigation around my home with lower premiums.

Howard Botts: Yeah, I think yeah Texas is another sort of ground zero for this. Uh you know like Houston is the most air conditioned city in the world. It even beats Saudi Arabia for most hours of air conditioning. Phoenix and Tucson uh Yuma County are not far behind. So yeah, you're in good company.

Allie Barefoot: Well, thank you again, Howard. This was super insightful. Definitely has given me a lot to think about. I really also thought a lot about what you said about universities and companies and people who work in agriculture. This is not just affecting homeowners, but affecting a society of people that are trying to make a living wage. So definitely given me more to think about and I hope to have you back on data and context to talk more in the future about whether it's Arizona's housing market or another quiet threat that we're seeing here in the United States.

Howard Botts: Well, thank you Allie. We have 49 states and the District of Columbia, so uh we'll be back frequently.

Allie Barefoot: Oh, I'm sure we have plenty more to talk about. Thank you so much, Howard.

Howard Botts: Thank you, Allie. Bye-bye.

Allie Barefoot: Thank you again to chief scientist at Cotality, Howard Botts, for breaking down that data for us on today's episode. And thank you guys so much for listening. If you haven't already, hit that subscribe button for me on Cotality's YouTube page. Drop a comment down below. Be sure to leave a like. And as always, if you want to find out more information, head on over to cotality.com.

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