Phoenix building restrictions squeeze construction firms and agents

A ban on residential building permits in parts of the Phoenix area is angering builders and agents, who feel it may curb the supply of affordable housing.

“Our main concern on the implication of the model that was released is housing affordability,” Spencer Kamps, the vice president of legislative affairs at the Home Builders Association of Central Arizona (HBACA), which serves homebuilders in Maricopa County, said. “Effectively, what we have created is growth boundaries.” 

In early June, the Arizona Department of Water Resources (ADWR) announced that it was denying any new certificates of Assured Water Supply (AWS) in the Phoenix Active Management Area (AMA), which encompasses all of Maricopa County and parts of Pinal County, for a total of 5,646 square miles and home to 4.6 million residents. In certain parts of the Phoenix AMA that do not have a designated water provider, builders and developers need a certificate of AWS to obtain a building permit. 

Arizona sees the ban as a precautionary measure to curb the effects of climate change, as it will limit the number of new residential properties built in the area. 

Maricopa County, which encompasses the cities of Phoenix and Scottsdale, uses 2.2 billion gallons of water per day and receives less than 11 inches of rain per year. More than half of the county’s water supply comes from groundwater. Much of the rest of the county’s water supply comes from the Colorado River, which is in the midst of a decade-long drought. More than 30% of the water used in Maricopa County each day — roughly 640 million gallons — is used for domestic purposes.

Rapid population growth is adding pressure on groundwater resources in the state. No metropolitan area in the country welcomed more new residents than Phoenix last year, at 76,000. 

The moratorium on residential permits was made after an analysis conducted in the first half of the year by the ADWR showed that over the next 100 years, 4%, or 4.86 million acre-feet of water of Phoenix AMA’s groundwater demand, would not be met.

“By proactively addressing opportunities for enhancing groundwater availability, we are demonstrating our dedication to long-term sustainability and securing Arizona’s water future,” Chris Camacho, president and CEO of the Greater Phoenix Economic Council, said in a statement.  

Arizona has long taken protective actions in the interest of water conservation. The state’s AMAs were put in place in 1980 via the Arizona Groundwater Management Act. The primary goal of the legislation and the AMAs was to ensure homeowners’ water needs were  being met, by forcing builders and developers to obtain permission from the state before drilling for water. 

Greg Vogel, the founder and CEO of Land Advisors, a Scottsdale-based land brokerage, had some stronger words about the analysis and the building ordinance.

“The original purpose of the Groundwater Management Act was really consumer protection,” Vogel said. “It needs updating and the analysis they did, I think is woefully inaccurate related to its accounting of the supply of groundwater. The analysis showed the entire region was 4% short over 100 years — no other state has anything like this ridiculous requirement.”

Questioning the rationale for the building restrictions, the HBACA said that Arizona was the only state that requires homebuilders to ensure a 100-year water supply in order to build.

Other states in the arid southwest impacted by drought, such as New Mexico, California and Colorado, have water supply requirements of 40 years, 25 years and 20 years, respectively.

The HBACA claims that the homebuilding industry is the only industry in the state required to meet 100 years of demand for ground water use.

Due to the restrictions these regulations have created, Kamps said the HBACA is concerned about the area’s housing supply and housing affordability moving forward.  

Under the new regulations, construction of new residential buildings can continue in areas that have a designated water provider since homebuilders and developers do not need an AWS certificate to obtain a building permit. The areas that are most impacted by this building ordinance are the town of Queen Creek, the city of Buckeye and other unincorporated areas of Maricopa County, Kamps said.

However, there is somewhat of a silver lining. There are 80,000 undeveloped lots that have certificates of AWS that the state has said can be developed as planned, which would help mitigate some of the county’s housing supply issues.

“We still have the potential for growth into those 80,000 units,” Kamps said.

“Within those designated providers there are limited opportunities to grow homes and therefore we think, potentially, over the long run the impact on affordability could be significant.”

Kamps added that he anticipates the prices of the 80,000 lots that already have AWS will also increase if developers chose to sell them, since there currently is a finite supply.

Phoenix, said Vogel, was already dealing with low housing inventory and increasing affordability issues.

On August 4, 2023, 5,259 single family homes were for sale in Maricopa County, down from 11,890 homes on August 9, 2019, according to data from Altos Research. During the same period, the median list price for a home in Maricopa County rose from $399,000 to $640,000, and the current Market Action Index score for the county is 51 — Altos considers anything above 30 to be a seller’s market.

“We have a deep shortage of housing,” Vogel said. “The AMA studies they’ve issues and the restrictions they have put in place do not help, but you can build commercial property and multifamily rental properties so long as it is not a subdivision in undesignated areas, for the moment, but there are bills being proposed to short-circuit that.”

While the building ordinance will certainly impact housing inventory, Elise Fay, a local eXp Realty agent, feels that, at least in the short term it won’t have a major impact on home prices.

“The homes they are looking to build in the restricted areas are on the outskirts of the city, so I just don’t see it having a big impact on housing prices,” Fay said. “The homes out there do tend to be more affordable though, so that is probably going to hurt some first time home buyers.”

Despite rising home costs and dwindling inventory, some local real estate agents who spoke with HousingWire said they weren’t overly concerned about the building ordinance.  

“No one is really talking about it,” Robert Shaw, the Arizona regional vice president of Hunt Real Estate ERA, said. “Since this is about building permits it will be years before it impacts the resale home market, which is the majority of homes agents deal with, so it hasn’t really been a big topic of discussion.”

Fay, a native New Yorker, to whom water shortages were a foreign concept before moving west, said she felt the building ordinance was a sign of the state’s commitment to the stewardship of water resources over the long term.

“Arizona has been innovative in their water management and [when] you realize that they have a 100-year water supply requirement for groundwater, you feel better,” she said.

Although the issuance of new building permits may be on hold for now and the excessive heat and drought situation in Phoenix, which has seen over a month straight of at least 110-degree weather, does not appear to be improving, the HBACA remains optimistic about the future of residential building in the metro area.

“When the governor announced it, she called it a pause and we were pleased to hear that because that told us that it wasn’t a permanent policy of the state,” Kamps said. He also noted that the governor has created a water council that is currently working on recommendations on how to fix the groundwater issues, which it will present to the governor in early 2024.”