Extreme Heat Meets Real Estate Boom: How Phoenix Is Securing Its Property Market

• Phoenix is proactively addressing its heatwave challenges, mainly through state-led resilience strategies.
• While there is confidence among industry experts, heat-related risks in Phoenix’s housing market are significant but long-term occurring.
• Despite innovative support from the state of Arizona and the financial industry, city’s property sector still needs to improve its long-term approach to climate risk data to prevent substantial losses and reinforced existing resilience efforts.

In recent years, Phoenix, Arizona, has become emblematic of the challenges posed by extreme heat. Known as the “hottest large city in America”, Phoenix experienced a record-breaking summer in 2023, with temperatures soaring above 110 degrees Fahrenheit (43.3 degrees Celsius) for 31 consecutive days.

Even in summer 2024, the city continued to endure high temperatures, often exceeding 100 degrees Fahrenheit (37.8 degrees Celsius). Furthermore, projected costs of annual heatwaves to the city’s metro area is about $1.9 billion under RCP 4.5 emissions scenario and around $2.3 billion under RCP 8.5 between 2020 and 2059.

These economic losses have profound implications for the city’s residents and its burgeoning real estate market.

Despite these projections, Phoenix’s economy remains attractive, drawing an influx of homebuyers. This demand has driven up home values by an impressive 50.5% between 2023 and 2024, with a risen median of $221,665.

However, this optimistic outlook raises critical questions explored in this article, regarding the market’s preparedness for heatwave impacts and its overall resilience: how Phoenix’s real estate market can adapt to the increasing frequency and intensity of heatwaves, and what lessons can be learned to enhance the city’s resilience.

Heatwaves undeniably pose considerable challenges to the real estate market in Phoenix, like in many heat-prone cities across the United States.

Prolonged exposure to extreme heat, often resulting in droughts, can lead to increased energy consumption, higher utility bills, and greater wear and tear on buildings. Asides exacerbating health risks, particularly for vulnerable populations, these factors can affect property values and the overall attractiveness of the market.

A recent example that underscores the vulnerability of Phoenix’s real estate market is the escalating water crisis, affecting over 800,000 homeowners, brought on by Arizona’s persistent drought.

The Rio Verde Foothills, a suburb of Scottsdale, was hit hard when Scottsdale cut off its water supply, citing the need to prioritise its own dwindling resources. This sudden water shortage forced residents to scramble for alternative sources, severely impacting their quality of life and property values. 

The water scarcity issue also poses significant risks to the financial landscape of the region. As people are forced to spend more on essential utilities like water, their ability to keep up with mortgage payments may be compromised.

This financial strain can deter banks from lending on homes in areas that depend on exorbitant water import, further exacerbating the problem. Potential buyers may shy away from such regions due to both rising costs and concerns over long-term sustainability.

This situation highlights the broader challenges facing Phoenix’s real estate market as climate change intensifies.

Uncertainties around essential resources not only threaten residents’ health and well-being but also jeopardises the overall stability of the market. Reduced lending, declining property values, and slowed market growth are all potential consequences of the ongoing water crisis, making the future of the region's real estate increasingly precarious.

This reality also challenges the optimistic outlook for the market’s future growth. It raises the need for a more comprehensive climate risk strategy to ensure both resilience and long-term housing market confidence in Phoenix.

Some of these adaptive measures can include the use of advanced tools such as “Adapt” by Climate X. This tool can offer essential insights into the financial impact of these risks by analysing asset-level exposure and identifying cost-effective adaptation strategies. Adapt enables homeowners, investors, and lenders to make informed decisions and bolster the market's resilience to extreme heat and water scarcity, ensuring the region remains viable in the face of ongoing climate challenges.

Phoenix’s strategy for tackling extreme heat has been significantly strengthened by new measures, mainly at the State level. During summer last year, Governor Katie Hobbs announced a state of emergency and signed an executive order to improve Arizona’s readiness for heatwaves.

Key actions include launching public cooling centres and creating an extensive "Extreme Heat Preparedness Plan", overseen by the Office of Resiliency. This plan seeks to reduce the health risks associated with rising temperatures, which have caused record numbers of heat-related illnesses and fatalities. These efforts are designed to protect residents and ensure the city is better prepared for future heatwaves.

Arizona's approach also has far-reaching implications for the housing market in its cities, including Phoenix. By addressing extreme heat risks head-on, the city is demonstrating proactive leadership and a strong commitment to public safety.

This reassures both current and prospective homeowners, signalling that their health and property values are being prioritised. Such actions can strengthen market stability and encourage further investment in the real estate sector, as buyers and investors gain confidence in the city’s resilience to climate-related challenges.

A 2020 report by the Berkeley Centre for Law, Energy, and the Environment indicates that U.S. insurers and financial institutions already explore potential creative strategies like parametric insurance and resilience bonds to address climate risks, including the growing threat of extreme heat.

Yet, significant challenges persist.

One key issue is the need for more comprehensive data on the financial impacts of extreme heat and the value of resilience investments. Additionally, questions remain about who the primary buyers of insurance should be in heat-vulnerable regions, adding to the uncertainty in developing effective solutions.

Furthermore, Milliman risk management experts emphasised in 2023 that understanding and mitigating the effects of extreme heat on the insurance sector start by capturing reliable and timely data – some of which include data on geography and heat among others – to produce effective forward-looking assessments of risks and fashion the best-in-class resilience approaches.             

Homeowners and investors gain confidence knowing that their properties are better protected against climate risks, leading to a more stable and attractive real estate market. By addressing these persistent challenges and implementing innovative solutions therefore, the financial sector can enhance housing market optimism.

Phoenix's response to extreme heat offers important lessons for building resilience in real estate markets: while state-led initiatives and rising home values reflect confidence, long-term risks like water scarcity and financial strain remain significant.

To safeguard market stability, Phoenix must adopt a data-driven approach, utilising advanced tools to assess vulnerabilities and guide investment. Strengthening efforts among financial institutions, policymakers, and insurers will also be crucial in developing innovative solutions.

Ultimately, Phoenix's experience highlights the need for a proactive, long-term climate risk strategy to ensure continued market growth and public well-being.