The mortgage lock-in effect continues to present a challenge in the residential market, warranting a recent story in the Wall Street Journal as well as a specific mention at the December Federal Reserve meeting by Chair Jerome Powell. Homeowners with low-interest-rate loans are staying put rather than listing their properties, because the high cost of funds gives them little financial incentive to do so. (More than half of American homeowners had an interest rate below 4% as of the second quarter of 2025; about 80% have rates of 6% or less.) Interest rates may decrease further in 2026, but they are very unlikely to drop below the low 5 percent range let alone into the 4 percent range. What’s needed, in order to break the lock-in, is for prices and mortgage payments to come down to levels perceived as affordable.
As anticipated for this time of year, not a lot of inventory came to market in the past month. January will serve as an early market indicator, especially once we start seeing physical signs popping up around neighborhoods and observe how fast they move through the market. Meanwhile, signs of distress and short sales are on the uptick, particularly among properties that were acquired in 2021-2022 that have come down in value to the point they are underwater. The trend is no longer confined to outlying areas with large inventories of new builds, however, and has extended into more central areas of the Valley. The affected product types are largely starter homes and move-ups, and specifically condominiums and attached housing. One of the key drivers is how expensive it has become for HOAs to manage and maintain their properties and shared amenities. Higher community association rates are having a notable impact on property sales.
From November to December 2025, the supply-demand index increased from 79.2 to 84.1, with a slight decrease in supply and increase in demand. The Federal Reserve dropped the Fed Funds Rate by 0.25 point once again on December 10 and announced that it would begin purchasing short-term bonds. These moves don’t directly affect mortgage rates, but they will help reduce short-term rates on credit cards, auto loans, and HELOCs.
Arizona’s Middle Housing Law Now in Effect
In December, the Pew Research Center published an article titled Housing Shortage Takes Center Stage that promotes ideas to tackle an estimated national shortage of 4-7 million homes, which has been blamed for unaffordable rents and home prices. Studies like this have spurred multiple municipalities across the nation to change zoning laws so that more housing units can be built.
In response to such studies, the state of Arizona passed the Middle Housing Law (HB2721) that took effect on January 1. This state law outranks existing local regulations for cities with at least 75,000 residents and decrees all single-family lots within one mile of a city’s central business district eligible for building townhomes, du-, tri-, and 4-plexes with fewer restrictions on height, parking, and building codes. There is no requirement that units built in these areas adhere to a specific legal definition of “affordable” in terms of cost to rent or purchase, which suggests its purpose is to drive down the cost of housing simply by building excess supply for the existing demand.
However, local statistics suggest the housing shortage in Maricopa County may already be alleviated. Apartment List’s December Report showed vacancy rates for 1- and 2-bedroom apartments soared from just 3% in 2021 to more than 8% last month. This caused monthly median rents to decline by $214 from a 2022 peak of $1,570 to $1,356 in November 2025, which is affordable for a household making $58K per year. The resale market is seeing similar effects as active listings are within normal range for the first time since 2014 and list prices are declining.
Are Phoenix Home Prices Getting More Affordable?
Affordability for homes depends on three major factors: the cost of the home, the mortgage rate, and the buyer’s income. As prices of non-luxury homes have declined and/or stabilized over the past year, so has the average mortgage rate. These two factors combined have helped bring mortgage payments down in the lower price ranges by hundreds of dollars already.
At the same time, incomes in Maricopa County grew by 34% over the 4 years spanning 2020-2024. Median family annual income, which measures only households with two or more people related by blood or marriage, was $108,000 in 2024 for Maricopa County. Using a general guideline that an affordable payment is 28-33% of gross income, a typical family should be able to afford $2,500-$3,000 per month. That payment coincides with homes purchased in the mid-$300K and mid-$400K range, which is exactly the range where active listings have been rising the most and sales prices have seen the strongest declines.
The fourth quarter of 2025 was the strongest year end for sales and contract activity in 3 years, coinciding with mortgage rates stabilizing for 4 months in the low-6% range for only the third time in 3 years. This provides hope for Q1 2026. The big surprise has been the surge of sales over $1M, up 22% combined from last year and a large portion closing in December. Closed sales under $300K have also seen notable growth, up 17% over last year, but not enough to offset the luxury surge. This caused the overall median sales price to spike this month, even as sub-$500K home prices continued to glide down. Fringe influencers continue to predict a crash, but the reality here is more stable and subtle. As annual incomes grow, affordability and demand are slowly improving in Phoenix.
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