Regional Report: 2025 Economic Outlook

Evaluating Greater Phoenix inflation and housing entering 2025

Over the course of 2024, Greater Phoenix experienced a dip in inflation and continued high employment rates as the economy expanded, backed by new jobs, higher wages and companies growing in the market. The region will aim to carry the momentum of these successes into 2025.

Regional leaders joined the Greater Phoenix Economic Council (GPEC) for a panel discussion about the local, state and national outlook of 2025, including priorities of the new Trump Administration that could impact the market. The speakers were:

• Michael Gregory, Deputy Chief Economist and Managing Director, BMO Capital Markets
• Kristen Stephenson, Senior Vice President, Research & Analytics, Greater Phoenix Economic Council
• Tina Tamboer, Senior Housing Analyst, The Cromford Report
• Moderator: Eric Sperling, CEO, Social Television Network

“This was one of the hottest markets back in the spring, and it continues to be a market that performs very solidly above average,” Stephenson said.

National outlook

After aggressive federal rate drops in late 2024, the fed is tempering the expectation of cuts going into 2025. Federal Reserve Chair Jerome Powell has said there needs to be more improvement on inflation, aiming to get it to 2%, according to Gregory.

That inflation measurement, the Personal Consumption Expenditures Price Index, sits at 2.4%, a tick above the lowest point of last year. “The fed knew the last mile to 2% was going to be a bumpy road,” Gregory said.

Despite that, BMO thinks there will be at least one rate drop in the middle of the year after a pause because the labor markets have slowed. Unemployment is up from a rate of 3.7% in January 2024 to 4.1-4.2% since June, indicating some risk of recession; however, according to Gregory, the Fed’s expectation is for unemployment to settle at 4.2% in the long run.

“The Fed has basically drawn line in the sand and said we do not need further weakening in the labor market to bring inflation down, and therefore we’re not encouraging it,” Gregory said. “That is fundamentally the key reason, along with further improvement in inflation, why we think they will continue to cut interest rates this year.”

Gregory said the policy rate could drop below 4% this year, which would bring it closer to neutral level around 3%. Long-term interest rates aren’t expected to drop as much due to the government deficit and inflation risk related to major tax cuts or tariffs, he said.

The stock market has potential to hit record highs through the impact of the strong economy today, continued rate cuts and the pro-growth agenda of the Trump Administration. In addition, policy passed under the Biden Administration including the Bipartisan Infrastructure Deal, CHIPS and Science Act and Inflation Reduction Act will provide support for the economy, particularly related to infrastructure, manufacturing jobs and clean energy investment, though the bills will be subject to potential rollbacks under the new administration.

Gregory sees strength in the household sector, which has a strong balance of debt-to-income despite households — particularly lower-income cohorts — feeling the impact of high prices.

“The consumer sector in aggregate, [is] very well-positioned to take advantage of when interest rates fall,” Gregory said.

These national figures could be impacted by legislation implemented in the first year of President Donald Trump’s second term. Gregory said BMO is waiting for more clarity but is watching administration priorities such as corporate and personal tax cuts, including the extension of the 2017 tax cuts, deregulations, tariffs, deportations and recommendations from the new Department of Government Efficiency.

Balancing economic growth and inflation in Greater Phoenix

The Greater Phoenix economy has been strengthened by the relatively rare combination of low unemployment rates alongside decreasing inflation. Over the last year, the unemployment rate of 3.5% coincided with a healthy inflation level of 1.6%. These two rates, which are typically inverse, helped propel the economy in 2024.

“This is a very positive thing for us. That doesn’t mean that we don’t have to still deal with some of the issues we’ve seen when you look at inflation — it doesn’t necessarily mean prices are going down, it just means they’re increasing less fast — so now we’ve seen these return to the numbers we want to see, below 2%,” Stephenson said.

Inflation levels in Greater Phoenix, which peaked well above the national average in 2022, decreased to match the U.S. level in August 2023 and has been below the national mark since. In 2024, the region’s 1.6% inflation rate was below that of the national rate, 2.9%, and tied for the third-lowest among the major metros analyzed by the Bureau of Labor Statistics (BLS).

“We have about 18 months now of sustained inflation rates below that of the US.,” Stephenson said.

Greater Phoenix added 40,000 jobs in 2024, bringing total employment to 2.5 million people. University of Arizona projects 2025 regional job growth to be about 2%, slightly outpacing that of the United States.

Stephenson said BLS data in spring 2024 showed Greater Phoenix had the largest decrease in unemployment rate among major metros at a time in which there was substantial employment growth.

“Our economy is looking very similar to the national picture, except a little bit better,” said Stephenson.

Greater Phoenix will work to continue finding equilibrium between employment and inflation over the next year. This priority includes watching wage growth, which outpaced inflation in 2023 and likely continued to do the same in 2024 due to decreased inflation, according to the most recent data available from the Bureau of Economic Analysis, which will release 2024 data in late 2025.

“It’s a balance,” Stephenson said. “We need to make sure we see that balance continue into the rest of 2025.”

Evaluating the housing market

The Cromford Market Index evaluates the housing market using supply and demand trends. Anything below 90 is considered a buyer’s market, while anything above 110 is a seller’s. The middle range is balanced.

Greater Phoenix, on the January 2025 Cromford report, is 91.3 — balanced, but teetering toward buyer’s, where the region was situated in November and December.

“Buyer’s markets are far and few between in Greater Phoenix,” said Tamboer. The only extended buyer’s market since 2000 was from 2006-08, and there are no forecasts of a collapse similar to the Great Recession.

Tamboer cautioned against waiting for the buyer-friendly market to align with a rate drop.

“I can’t guarantee that they’re going to have a buyer’s market with it because oftentimes, by the time those rates get down, we start to move out of those buyer markets and start to see seller markets,” she said.

Despite being in buyer territory, the change in dollar per square foot from December 2023 to December 2024 (6.7%) exceeded the national rate of inflation (2.9%). Tamboer’s data shows that this is primarily in the luxury market, with a large increase of houses sold at over $1 million, and an increase of price per square foot at the $1M-$1.5M range of 3.3% and over $3 million of 7.4%. The price per square foot for houses in ranges under $1 million did not exceed the rate of inflation.

“You’ve got a data set that’s top-heavy, and it’s pushing all of your averages up,” Tamboer said. “90% of all of our sales are under $1 million. Most of those appreciations are flat and following along with what we would expect from six months or so in balance or buyer market territory.”

There’s a similar trend in total sales, in which the market rates differ between homes above and below $1 million.  There were just under 67,000 total sales in 2024, a 1.7% decrease since December 2023.

“That’s showing us that we’ve got stability, but it’s still extremely low for the size of our metropolis,” Tamboer said.

Meanwhile, sales for homes above the $1 million threshold increased by 13.8% year-over-year.

“[There is a] perception that home values just continue to rise and rise and rise and rise, when it’s really the changing of our makeup and our economy, and a luxury division that’s starting to really grow,” she said.

Mortgage rates over the past year have fluctuated quite a bit, particularly since the Federal Reserve announced on Dec. 18 that they would drop the federal funds rate and reduce securities holding. “That means they’ll sell bonds, which causes the rates to go up,” Tamboer said.

The market immediately reacted, ticking above 7%, which Tamboer said is “generally not good for overall demand.”

Despite this, with prices remaining rather flat and days on market increasing substantially over the last year, there are opportunities for buyers to purchase before a decrease in rates would lead to a likely increase in prices.

“Everything is pointing toward buyers right now. It’s a good opportunity for those not-so-perfect buyers,” said Tamboer. “This is the market for them.”