Gimme Shelter: It ain’t easy to buy a house in Tucson’s bonkers housing market. And rents aren’t getting any cheaper.

click to enlarge Gimme Shelter: It ain’t easy to buy a house in Tucson’s bonkers housing market. And rents aren’t getting any cheaper.
Bandit Riveredge
Homes for sale around Tucson can receive multiple offers during their first day on the market, forcing buyers to act quickly — sometimes not even seeing the property prior to purchasing.

In December 2019, Eric Smith found out he and his wife, Janelle, were expecting their first child, so they wanted to move out of their apartment and into a home.

Then the pandemic hit in March 2020. Smith, a bartender at midtown seafood restaurant Kingfisher, was soon out of work. Smith and his wife decided to hunker down instead and wait out the pandemic.

In April of this year, they renewed their house hunt, feeling optimistic about their chances of finding a good home at a fair price. Despite having heard about the "crazy market," Smith thought the process would at least be fun.

Instead, it was stressful.

Smith had only returned to work full time in February after being out of work for most of the past year. He struggled to get pre-approved for a loan.

In April, the loan broker told them they were pre-approved for up to $300,000 and with the help of their friend and real estate agent Akala Jacobson, the couple felt excited about starting the process of buying a home.

But that optimistic attitude wouldn't last.

"I've lived here for 30 years, but going and seeing these houses and all these different little neighborhoods is supposed to be fun. It ended up really stressful," said Smith. "I don't know what I was expecting. I was expecting it to perhaps be a little bit more affordable."

Smith and his wife were looking for a three-bedroom, two-bathroom home at no less than 1,100 square feet. They found nothing available below $200,000.

"I don't feel like we're looking for a lot," said Smith. "That for me was kind of shocking to me. I had lived in a house that I was renting that sold three years ago. It was three bedrooms, two bathrooms, approximately 1,400 square feet. It sold for $140,000."

Not only were the homes less affordable, but in a highly competitive market, they lost out to several offers way above the price point.

His craziest experience came when the couple put in an offer $25,000 over list price for a midtown house near Rosemont and Broadway boulevards that was less than 1,200 square feet and listed at roughly $265,000. They were told someone came in at $335,000 and waived the appraisal fee, offering to cover anything the appraisal would not cover with cash. In another case, a house they put in an offer for had about 25 other offers.

At that point, Smith said they considered calling it quits and renewing their lease.

"We feel like we're in a pretty good position financially but it gets dispiriting," Smith said. "It's hard to keep looking. Homeownership, it's this goal. It's this thing that you want to get to that helps set you up for later in life and then something like that happens and you're like 'God, are we ever gonna be able to buy a home?'"

Despite the high price of homes, they were still motivated to continue the hunt because they didn't know how much longer the current low-interest rates would last.

"We could wait. We could re-sign a lease but are we going to be able to get a 3.25% interest rate next year? Who knows? And at a higher interest rate, obviously, we would be able to afford less house," said Smith.

With a pre-approved loan, little debt and $44,000 in Jeopardy winnings Smith took home after winning two shows in September 2019, Smith felt he could be competitive in the market.

"That's what allowed us to offer concessions to the seller, to offer to cover a low appraisal. That all rests on the fact that I won on Jeopardy," said Smith. "Without that, we would have either had to borrow money from parents or we wouldn't have gotten the house that we have that we had an offer accepted on, that's for sure."

They saw hundreds of houses and made seven offers before finally finding a home and having their offer accepted on June 1.

"When your agent calls you up and is like, 'They accepted your offer,' it's just joy and then it's terror at all the things that could happen after the offer is accepted," said Smith.

Smith found a home that the owners had bought in February for $166,000. Smith's offer was $280,000. They ended up offering $5,000 in seller concessions and offered to cover a spread on the appraisal of $11,000. While they wait for the appraisal of their home, Smith estimates they would have to pay an additional $33,000 if they receive a low appraisal, plus the down payment and closing costs.

Additionally, Smith said the house and yard need some sprucing up. Including the mortgage, the principal, the interest, mortgage insurance, homeowner's insurance and property taxes, Smith expects to pay roughly $1,400 a month.

"We're fortunate to be in a position where we can do that, but I know there's a lot of people out there (for whom) that would be a non-starter," said Smith.

Smith is hardly alone in struggling to make a house purchase in Tucson's bonkers market. While the pandemic has been rough on bars, restaurants, performing arts venues and other sectors, the housing market has seen prices skyrocket.

The surge in housing prices has been partly driven by more people moving to Arizona and a lack of housing inventory, according to University of Arizona's Economic and Business Research Center Director George Hammond.

"As a segment of the workforce finds itself allowed to work from home by and large—and it looks like a significant segment of those who are allowed to work from home during the pandemic will be allowed to do that on a more permanent basis—that frees them up to move around the country," said Hammond. "Significant numbers of people are looking to move out of the high-cost, Western metropolitan areas, particularly those in Southern California, where Arizona draws most of its migrants, and are choosing to move to Arizona."

The migration into the state is increasing the demand for housing, which is relatively affordable compared to high-cost Western metro areas, but not enough houses are being built to fill the demand.

"We've also seen a big decline in the housing inventory. It was trending down before the pandemic and it really declined rapidly during the pandemic," said Hammond. "So we have increased migration into Arizona, which is increasing demand for housing. People are looking for houses and at the same time that fewer people are selling their houses and that's a recipe for really rapidly rising house prices."

The Tucson Association of Realtors did see a dip in listings through 2020, but it only lasted for a few months before they began to see a rebound effect, said CEO Randy Rogers. Aside from increased net migration, he said people began to feel more comfortable moving.

"People that were holding it off because they couldn't find another house, so they said, 'Well I'm just gonna hang tight because I need to live somewhere,' and rentals were hard to come by. New houses were hard to come by. They didn't want to act that quickly, so they held tight. Now they're feeling better about it," said Rogers.

Also, lower interest rates have given people more buying power.

"If you're paying 8% on interest, you could buy 'X, if you're paying 3% interest or less you can buy 'X plus,' " explained Rogers. "I think that is allowing homeowners to get into these homes that they, maybe in a higher interest rate market, would not be able to get into."

Home sales are up and existing houses on the market are also selling incredibly fast. Rogers said their pending sales are up by 35% for the month of April and almost 18% for the year. He remembers a time when houses would stay on the market for a month or more. For the month of April, time on market was down to 15 days and for the year through the end of April it was down to 21 days on market, said Rogers.

"It's not like there aren't houses selling," Rogers said. "There are a lot of houses selling, more houses selling. We're almost back to where we were, just shy of 2019 and 2019 was a very strong year. We just don't have the inventory out there. We don't have new-home inventory. We don't have existing inventory that sits for any period of time."

Since the Great Recession, the number of houses built in Pima County significantly declined, with fewer than 4% of homes built after 2009, according to the Making Action Possible (MAP) Dashboard Housing Market Study, a regional housing market study conducted in partnership between the City of Tucson, Pima County and UA's Economic and Business Research Center.

"We've had a five- to almost 10-year lag time of new home building, and that's not that they're not building," said Rogers. "Our partners at the Southern Arizona Home Builders Association, and all of their members are doing a great job of building. We just had a lag here, and we didn't see the growth in Tucson that we saw in Austin or Dallas or some of those cities."

The severe shortage in inventory, coupled with increased lumber, concrete and copper prices, makes building homes more expensive as prices for the construction industry rapidly increase.

"They're off the charts, practically," Hammond said. "Copper prices are up significantly, really pretty much across the board. Input prices for construction are rising rapidly."

Construction firms also face continued difficulties in attracting workers. Hammond said this is a long-term trend for Arizona since the end of the Great Recession, with the huge employment declines.

"We're not going to see a break from that anytime in the near future," Rogers said. "We're probably two to five years away from catching up on some of those things. I'm not sure things like lumber, or concrete will come back down. I think it's just the material costs to build a home. It's not the builder jacking up the price just to jack up the price. The builders' costs are going up, so they have to in order to maintain profit."

Because of the low inventory and high demand, homes are selling at list price or above list price, according to Rogers.

"If you list your home at $100 it's definitely gonna sell at $100, and in most cases, it's going to be higher than that," Rogers said. "Somebody needs your house, they can pay $20, $30, $40,000 more because they need a house."

The short time that houses remain on the market means not only paying at the listed price or more but also buying a home without concessions.

"If you go back in time, you would put an offer on a house and you would say, 'I would like them to fix the carpet and leave the washer and dryer and maybe do one or two other things.' Today that's not even an option," said Rogers. "It's not unusual for a home to have 10, 20 or more offers on that house, sometimes cash offers."

If a seller can decide between a cash offer with the house as is, a cash offer with a buyer seeking concessions, or a financing offer, the seller will choose the cash offer with no requests, explained Rogers. He said buyers should be pre-qualified and prepared to purchase.

"Be ready to move and be ready to move on quickly and make decisions fast. It's not a time to wait," said Rogers.

Hammond cannot say for sure how much of the current market is caused by ongoing trends or the pandemic, but expects net migration surge and supply chain issues caused by the pandemic would gradually subside.

"I think that the increases that we're seeing in construction inputs, some of what's driving that are essentially supply-chain problems and adjustment problems that are caused by trying to come back to full production after a pandemic, it's just hard to do. So I think things will gradually subside," said Hammond. "More homes will start to come on the market. Once you get to the end of the pandemic they'll start making more longer-term decisions and more of those homes will come on the market."

Hammond noted that both single-family and multifamily house permits are up to just over 60,000 permits this year, the highest level of permit activity since 2006.

"The new homes coming on the market will increase over the next couple of years as well and that will help to slow the growth in house prices," said Hammond.

Overall, Rogers believes the growth will continue, but different segments of the market will balance out.

"Your higher-end Foothills, Oro Valley, Marana homes, those will still maintain, but I think we'll start to see some moderately priced homes will begin to balance a little bit more if things stay the same," said Rogers.

Higher interest rates would also cause the market to balance, but after speaking with an economist, Rogers said while they anticipate a slight rise in interest rates, he expects they will still be in the 3% range at least through 2022 "unless there is some major world issue similar to what we had, be it a war, be it an economic event in the world or within the nation."

While housing prices increase creating a booming market, housing affordability continues to decline in Arizona, trending down from where it was five or 10 years ago.

"We reached a peak in affordability not long after the Great Recession when house prices hit bottom, but since then house prices have been rising at a fairly rapid pace, generally faster than the income growth and certainly over the past year house prices have risen at a faster pace than overall wage growth," said Hammond.

According to the MAP Housing Market Study, the Tucson Metropolitan Statistical Area (MSA), meaning all of Pima County, had a median home price of $238,900 in 2019.

When compared across 12 western metropolitan areas, Tucson ranked fourth-lowest median home price through the end of 2019, but had the second-highest growth rate of median home prices at 7.1%. As of 2018, 62.4% of households in the Tucson region own their home.

"Statistics prove, over time, that the home, your home, is the single biggest wealth-building opportunity you have and so it is imperative of us to figure out the American Dream, to buy a home, and how do we make that the most affordable and the most accessible for the number of people who are in it," said Rogers. "Generational wealth is created by this. I mean it's staggering. The difference between homeowners and non-homeowners, as to wealth that they build as well as wealth that they potentially transfer down to their families."

However, the generational wealth created by owning a home is also maintained by higher wage earners, as housing affordability differs across income groups, with single-family housing affordability much better for high-income groups than lower-income groups, said Hammond.

The U.S. Department of Housing and Urban Development defines affordable housing as housing in which the occupant(s) pays no more than 30% of their income for gross housing costs, including utilities. The MAP regional housing study calculated what housing affordability would look like for different households with varying incomes across the Tucson MSA based on HUD's definition.

Based on their calculations, households with two or more members and a higher income are better able to afford a home. With an estimated household income of $80,000 and four household members, the maximum home price would be $232,000. A single-parent construction worker with an estimated household income of $40,000 would be able to afford a maximum home price of $116,000.

However, the lower-income earners with only one household member would be unable to afford the median home price in Pima County. They calculated that a healthcare support worker earning $27,000 a year could afford a maximum home price of $78,300 and a part-time retail worker earning $13,000 could afford a maximum home price of $37,000, about six times lower than the median home price.

"Typically, folks who are minimum wage or on the lower economic spectrum, they rent, and individuals and families on a higher income spectrum, they own, because they recognize that it creates that generational wealth," said Arizona Housing Coalition Executive Director Joan Serviss. "What happens is we have a lot of our extremely low-income households suffering because their rent has just gone up too much, and COVID-19 has exacerbated this situation."

Those lower-income earners may rent due to the lack of housing affordability, but also face a greater cost burden than homeowners, meaning those households pay greater than 30% of their income on housing costs, including utilities. According to the MAP housing study, about one-third of households in Tucson are burdened by housing costs. In 2019, Tucson renters were more than two times more burdened by housing costs than homeowners, which is consistent with the state and nation.

Further, the lower the income for a renter household, the greater the housing cost burden. Almost 90% of extremely low-income rental households are burdened by housing costs and about three-quarters are severely burdened, meaning they spend more than half of their income on housing costs and utilities, according to the National Low Income Housing Coalition. This is compared to only 19% of middle-income rental households who are burdened by housing costs (and just 1% are severely burdened).

"Rents are just not keeping up with incomes and wages and so ultimately Arizona can only meet a quarter of our state's housing needs in terms of rental housing," said Serviss.

Arizona only has 26 affordable and available rental homes for every 100 extremely low-income rental households, according to the National Low Income Housing Coalition. The state has 183,652 extremely low-income renter households. In order to afford a two-bedroom rental home in Arizona, someone would need to earn $21.10 an hour; at the current minimum wage, they'd need to work 70 hours per week.

Without affordable homes, people face homelessness, an existing issue in Arizona exacerbated by the pandemic.

"COVID has really shone the spotlight on the importance of home because it's now a place that we not only find respite from the virus, but it's often not just our home," Serviss said. "It's now our workplace. It's now for my kids, it's their jungle gym. It's basically a respite from the pandemic, but far too often, there's folks who can't shelter in place. They're really struggling and those folks that can't shelter in place are those folks who are experiencing homelessness."

Before the pandemic in Arizona, the Arizona Housing Coalition would conduct their annual point-in-time "street and shelter count." From the last count conducted in January 2020, Serviss said 10,979 individuals were experiencing homeless, either sleeping outside or in a shelter, emergency shelter or transitional housing. In urban communities such as Tucson and Phoenix, Serviss said they are seeing an increase in unsheltered homelessness, with people sleeping in cars or encampments.

"We're seeing that obviously because there's just not enough affordable housing supply," said Serviss. "People often say, 'Oh that they're abusing drugs or they have mental illness.' Oftentimes the real reason is they just cannot afford that first and last month's rent."

In order to bridge the gap in affordability, the Arizona Housing Coalition continues to advocate for mainly two things to increase state investment towards housing and homelessness: enacting a state low-income housing tax and the restoration of the Housing Trust Fund.

The State Low Income Housing Tax Credit mirrors the federal program that has been around since the mid-'80s and, Serviss said, "is frankly responsible for about 96% of all the affordable housing in our nation, a wildly successful program."

She explained the tax credit would be helpful for anybody with Arizona tax liability, like big institutions, organizations and corporations that would take that credit. If implemented, Arizona would join 22 other states that have a state low-income housing tax credit.

"It serves as an additional layer of financing to make affordable housing work, to make it pencil, to make more units become available to be built," said Serviss. "Construction costs are so expensive right now. We have a lumber shortage and supply shortage on so many different fronts and so if we have a state low-income housing tax credit because you're not able to charge market-rate rent, you still have to build the unit, and so that tax credit helps make that deal work, makes it pencil."

Using impact analysis from state economist Elliott D. Pollack and Co, the Arizona Housing Coalition expects the tax credit would result in the construction of at least 6,140 additional affordable rental units over six years.

The coalition also hopes to restore the state Housing Trust Fund used to financially support services, such as rental assistance, foreclosure and eviction prevention, construction for affordable housing and emergency housing needs. Until 2010, the sale of unclaimed property made up a large part of the fund's budget, but recession-era cutbacks capped the Housing Trust Fund at an annual $2.5 million.

"That's really not a lot of funding to address the housing crisis in our state, and the Housing Trust Fund is a really flexible fund to meet housing challenges," said Serviss. "Obviously, right now, we're dealing with this current challenge of the pandemic, but four years ago we didn't have the pandemic, and yet the Housing Trust Fund was highly responsive to whatever else was going on four years ago or 10 years ago, but it's not that responsive when it's capped at $2.5 million."

At its peak in 2007, the Fund received $40 million and provided housing relief for more than 12,000 households, according to the Arizona Housing Coalition. They hope to restore the fund to its original level of 55% of unclaimed property proceeds.

"That's why we're seeing these increases in homelessness. That's why we're not having enough affordable housing development supply or stock, because we're not making the proper investments," said Serviss.

Joanna Carr, the coalition's research and policy director, created an Affordable Housing Toolkit with best practices and suggestions for local leaders. At the heart of the suggestions is zoning, Serviss said.

"How can we create more density in what's typically been a single-family residential zoning area? How can we make the building process expedited? How can we waive fees and fines and can we make the housing development process faster and more efficient, because that obviously is going to reduce costs," said Serviss. "But ultimately it's our local jurisdictions in our cities and counties that received the majority of the federal funds from HUD, and from Congress when they passed COVID-19 relief packages. It's our local jurisdiction leaders that are taking these funds and trying to fill in the gaps and put it to where it's best needed."

As housing advocates, Serviss said they advocate for how to use those funds, like converting unused hotel, motel and office spaces into permanent housing. Aside from a lack of resources, the biggest challenge they face is community opposition.

"Not everybody wants a shelter or affordable housing development in their community, so we have a lot of 'Not in my backyard' NIMBYism," said Serviss. She argues the developments are much nicer than what people would normally imagine as the "big ugly brown buildings" found in NYC projects.

"We need to lift up the importance of 'Home' because 'Home' is that foundational support of which you can go to school and access health care, and you can get a job, if you have that safety and stability of home," she said.

Addressing housing is a way of addressing systemic racism and pandemic will exacerbate the connection between race and housing, Serviss said.

"We're gonna have a K-shape recovery where our low-wage workers, who are typically workers of color, are going to be more impacted by job loss and then ultimately eviction crisis, eviction impacts," said Serviss. "If you get evicted, that stays on your record for a while so you're gonna have that much of a harder time to get into your next apartment. And let's say you rebound with jobs—we know that workers of color face significant barriers in accessing those employment opportunities (compared to) their white counterparts."

A renter-versus-owner analysis on the MAP dashboard found that any minority household in the Tucson MSA, consistent with the nation, is less likely to own their home than white households. The report published last year found Black households were the least likely, with 36.3% living in owner-occupied homes, and American Indian and Alaska Native had the second-highest percentage at 56.2% of those living in renter-occupied homes in Tucson.

Despite a lack of census data on the housing cost burden by race and ethnicity, the MAP Housing Market Study found that among all the minority groups in the Tucson MSA, more than half of households have the potential to be burdened by housing costs if they pay a mortgage on their home. When renting, more than half of American Indian/Alaska Native households in the Tucson MSA have the potential to be burdened by housing costs and fewer than half of households in all other race groups have the same potential.

"When we talk about housing, that's really where we can start addressing some of these imbalances of power with households of color," said Serviss. "If we invest in housing, we can start to really fix that imbalance. Because then kids can grow up and receive the same kind of educational attainment that white counterparts can, and they have that much more of a leg up. I think oftentimes politicians will think about education, but again, where you live very much impacts your education, what schools you can go to."