Across the West, 35 to 40 million people rely on the Colorado River Basin for water. The region is experiencing a 26-year drought, with Lake Mead, Lake Powell and the Colorado River all at historic low levels, according to the U.S. Department of the Interior.
Federal officials issued major restrictions in late August, ordering California, Nevada and Arizona to cut water use by 1.25 million acre-feet annually over the next two years. Arizona will absorb the deepest reductions.
In an area already battling drought, wildfires and other climate-driven risks, the new restrictions are likely to have a chilling effect on new development. But can potential buyers (and sellers) expect these changes to impact home sales and prices?
For real estate professionals tasked with helping buyers navigate those local markets, the discussion of where to buy and the costs involved becomes even more nuanced, experts say.
New development will slow, but existing homes may see more demand: economist
Water restrictions are likely to curtail new building and development, but that trend could increase the home values for existing properties that have secure water rights, said Orphe Divounguy, former Zillow economist and founder/chief economist of Quantitative Research Group.
“I actually expect a growing kind of premium on homes and communities that can prove they have secure long-term water supply,” Divounguy says. “Water risk or scarcity is going to hit housing supply before it hits the price of existing homes.”
Water restrictions raise the cost of acquiring, treating and delivering water for new development. That leads builders to shelve or delay some projects, he noted.
“I think on the builder side, you might see kind of a slowdown,” Divounguy predicts.
A broader market thaw is already taking shape in parts of the West due to higher mortgage rates and more inventory sitting on the market as buyers face affordability pressures. Divounguy expects Arizona to feel more pressure than Las Vegas or Southern California from the new water restrictions, but he’s careful to attribute a more pronounced cooling solely to water issues.
According to Redfin, Arizona home prices rose 0.8% year-over-year in July, while home sales went up 2.9% and the number of homes for sale fell 2.4% over the same period. In Nevada, a similar but more pronounced trend: home prices in July were up 2.9% compared to last year, home sales rose 4.9%, and inventory was down 4.1% compared to a year ago.
California home prices rose 1.3% in July compared to last year, with home sales up 1.9% over the same period. But like its neighbors, the number of homes on the market dipped 5.6% in July from a year ago, Redfin reported.
How Arizona is meeting the moment
Todd Menard, chief operating officer of West USA Realty in Phoenix, has worked in the Phoenix real estate market for more than 30 years and he teaches the state’s mandatory water course for licensed real estate agents.
The biggest impact from water issues, Menard predicts, will be on new construction, not existing resales. That’s primarily due to impact fees, which are one-time charges levied by local municipalities and utility districts on new real estate developments to pay for new growth. The fees are borne on the front-end by developers, but eventually get passed down to homebuyers through home prices.
Menard noted that impact fees in the Phoenix metro area were about $8,000 per improved lot in 1991, but have soared to $60,000 per improved lot today, and are “just built into the framework.”
In late 2024, the Arizona Department of Water Resources adopted a rule to require developers to prove they had access to a 100-year water supply, plus another 33%, for new developments. While builders still need the 100-year certification in some areas, a Maricopa County Superior Court judge ruled in June that the agency lacked authority to impose the extra 33% requirement, which developers had called an illegal “tax,” according to local news reports.
While water access is a hot-button issue, “Arizona is not in a water crisis,” Menard says, adding the state does not have a “water shortage,” a characterization he sees mainstream news reporting often gets wrong. But to ensure the state doesn’t run into trouble, it must keep managing its aquifers and reservoir levels carefully during this long drought cycle, he added.
According to Arizona State University’s Kyl Center for Water Policy, 41% of the state’s water comes from groundwater, such as aquifers and reservoirs; 36% relies on the Colorado; 18% from in-state rivers; and 5% from reclaimed water.
However, there’s no doubt the new restrictions will impede new housing developments as those projects become less profitable and harder to secure approvals for, Menard says. Still, he’s more concerned with rapid multifamily overbuilding since those developers typically don’t need to secure a 100-year water certificate.
Menard also points to the unprecedented speed and scale of new data center projects, which don’t trigger the same water reviews of residential developments yet they consume significant resources.
“If I was a homeowner buying in certain particular areas, you take enough of that power that’s at a cheap rate right now, and eventually it’s going to get more expensive,” Menard says. “If water goes to private and if data centers end up being everywhere, then we’ll have an absolute zoning and planning faux pas.”
What’s on the horizon
When asked how lenders and insurers price water-supply risk into mortgages and valuations, Divounguy explained that everyone foots the bill.
“Unfortunately, we kind of all pay for that,” he said, adding that climate-change-related risks will push up home insurance premiums and property taxes, making affordability more challenging for the typical buyer.
Still, Divounguy said he doesn’t expect any localized collapse in housing demand even as homeownership costs rise in water-stressed markets. And, in some cases, water issues might create a window of opportunity for wealthier buyers to set their sights on these Western markets, he pointed out
“You’re probably going to continue to see these maybe more affluent people moving into these massive homes on beautiful golf courses, because they’re the only ones who can afford it,” Divounguy said. “(At some point) it’s only the high‑end, the wealthy, older Americans who will select into these areas because they can afford it.”
