Phoenix has long boasted of numerous lifestyle advantages that have drawn newcomers from around the country to the desert. Among these, the low cost associated with the Metro Phoenix housing market — especially compared to California — has been key to the Valley’s growth. But since the start of the decade, housing affordability has eroded, leaving buyers and sellers unsure if 2026 is the right time to make a consequential financial decision.
The Arizona Association of REALTORS reports that the housing market is showing signs of balance after years of higher interest rates, limited inventory and buyer hesitation. Looking ahead, interest rate cuts in 2026 are expected to be slow but steady, offering a potential signal that prospective buyers have been looking for.
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Mortgage interest rates — which impacts the overall cost of a home — haven’t fallen as quickly as some had hoped after being raised to fight inflation. Ali Wolf, chief economist for Zonda, says she predicted rates would drop in 2025, but only a slight dip materialized. Many factors contributed to keeping interest rates elevated, with Wolf calling the tariffs announcement an exogenous shock that scrambled forecasts.
“There were lots of fears of what was going to happen after ‘Liberation Day,’” she continues. “Investors thought it would lead to higher inflation, which meant there was pressure to keep mortgage interest rates from coming down.”
That said, changes did occur in the market. 2025 started with interest rates over 7% but held below 6.5% from September onward. That translated to an 8%-11% increase in purchasing power, Wolf explains.
“Put a different way, moving down to a 6.5% interest rate has priced in an additional 2 million households into the market,” she continues. “If we can get rates to hold at 6%, we’d see 4 million more household priced in.”
Sean Fergus, executive director of research for Zonda, adds that for every 50-basis point reduction, an additional 2% of households across the nation are priced into the market. In the context of the Valley’s 2 million households, every time interest rates drop a half percent, about 40,000 more households get priced in.
“That’s not to say all of them are going to purchase a home,” he continues. “But it does widen the pool of potential buyers. More renters would be able to afford a home, and people who’ve been waiting to upgrade or downsize their house might feel it’s the right time. A rate reduction would create tens of thousands of additional transactions because of that.”
Building confidence
Of all the transactions consumers make, buying a home ranks among the most consequential — not just because of the price tag, but because where someone lives impacts so many aspects of life. Wolf says it’s important to remember that affordability isn’t the only factor under consideration when purchasing a home. People need a good reason, whether they’re looking for a smaller home after retiring or need more space to raise children.
Perceptions about the health of the economy also influences the willingness of would-be buyers to enter the market. Jim Rounds, president at Rounds Consulting Group, says that the consumer confidence is at a “reasonable level” despite the international and domestic events making headlines. That said, Rounds notes that consumers are quick to highlight negative news around job losses or price increases when surveyed about the economy.
“They’ll say, ‘I feel terrible, I don’t know what I’m going to do,’” he continues. “But when asked about any big purchases made over the last year, the same people will say, ‘Oh yeah, I bought a new car and a bigger TV for the Super Bowl.’ That means they’re listening to the stories, but it’s not changing their propensity to consume as much as you’d expect.”
Wolf adds that wage growth, interest rate compression and a dip in cost are welcome news for potential home buyers. But even though home prices are down from their peak, they are still up 65% since 2019, meaning renters are more likely to stay put. For the housing market to not just survive but thrive, Wolf says prices need to be pushed down further.
“More wage growth and high-income job growth would help, and we probably need interest rates to come down more,” Wolf continues. “There’s going to be a generational transfer of wealth, with huge amounts of money [passed down from Baby Boomers to their children.] That will only help some consumers though — it won’t keep the whole market up.”
Seeking stability
Making predictions about something as complex as the economy is a difficult task since unforeseen changes can upend market dynamics with little warning. Black swan events aside, there is enough data available to make reasonable estimates about the direction of the housing market.
For Wolf, she expects 2026 to be more of the same. Mortgage rates are likely to hover in the low 6% range for the bulk of the year, though that could change depending on who replaces Jay Powell as Federal Reserve chair when his term ends on May 15. But even if the new Fed chair pulls rates down, that doesn’t mean mortgage rates will immediately follow suit if bond investors fight it.
So, what will cause consumers to reenter the market? Wolf sums it up in one word: stability — in the labor market, from policymakers and home prices.
“We are paying close attention to pent-up demand after four years of people deferring the decision to purchase a home because of the ‘fear of buying at the top’ or losing their job,” she concludes. “But the demographics for housing have never looked better, we just need consumer to feel confident that now is the time to reengage with the market.”
