Location, location, location: Home price declines vary widely across metro Phoenix regions

Housing prices in the Phoenix metro area continue to plummet and the rate of decline has accelerated, according to Karl L. Guntermann, a professor of real estate and finance at the W. P. Carey School of Business. But in contrast to areas of the desert city that are experiencing deterioration, certain parts are holding their own.

Housing prices in the Phoenix metro area continue to plummet and the rate of decline has accelerated, according to Karl L. Guntermann, a professor of real estate and finance at the W. P. Carey School of Business. But in contrast to areas of the desert city that are experiencing deterioration, certain parts are holding their own.

This is Guntermann's second report based on the Arizona State University Repeat Sales Index (ASU-RSI). The December ASU-RSI report, which adds September data, shows that from July 2006 through September 2007, the total decline in house prices across the Phoenix metro area was 4.4 percent. From September 2006 to September 2007, the decline for the entire market was 3.79 percent. The performance of individual geographic sectors within the metro has varied widely, however.

The City of Phoenix and the Northeast Valley, made up of the upscale cities of Carefree, Cave Creek, Fountain Hills, Paradise Valley and Scottsdale, are holding their own with approximately a 1 percent gain or loss over the preceding 12 months. This contrasts with the Northwest, Southeast and Southwest Valley regions that experienced severely deteriorating market conditions. For the first time one of the regions — the Southwest — posted a double-digit annual decline.

"The December report represents a 12-month moving average for the third quarter ending September 30," explains Guntermann. "The ASU-RSI data goes back to January 1990 and the 3.79 percent represents the biggest decline in housing prices over a 12-month period since the February 1989 to February 1990 period when home prices dropped 5.01 percent, during the last real estate recession."

The ASU-RSI

Most popular indices — such as those developed by the National Association of Realtors — measure median house prices; however the ASU-RSI index is based on repeat sales. The use of repeat sales data for the same house is considered the most reliable way to estimate price changes in a housing market, says Guntermann, because repeat sales compare the prices of a single house against itself.

Indices based on median or average prices may be based on samples where house size and other factors are different each period. In that case the indices measure not only price changes but differences in the physical and other characteristics of the houses. The ASU-RSI tracks closely to the S&P/Case-Schiller Index for Phoenix since the same methodology is employed for calculating both indices.

The ASU-RSI, however, scrubs the data differently, dropping transactions with sale prices less than $5,000 and where homes increased more than 60 percent annually. The best performing Valley of the Sun regions in the third quarter were the Northeast, which actually saw a slight increase in housing prices from September 2006 to September 2007, and the Central region, incorporating all of Phoenix, which experienced only a slightly negative hit of –1.3 percent. That wasn‘t bad considering what happened to the rest of the metro area, Guntermann said.

From September 2006 to September 2007, housing prices dropped 7.1 percent in the Southeast region, which stretches from Tempe through Mesa, Gilbert and Chandler to the smaller cities of Apache Junction, Higley, Queen Creek and Sun Lakes; 8.2 percent in the Northwest region — comprising the cities of El Mirage, Glendale, Peoria, Sun City, Sun City West, Surprise and Youngtown; and a painful 10.1 percent in the Southwest region — a grouping of Avondale, Buckeye, Goodyear and Litchfield Park.

According to the ASU-RSI data, the greatest period of price changes occurred in September 2005, when housing prices in the Phoenix metro area vaulted an astounding 43 percent, compared to the same period a year earlier. After that, the rate of housing price changes decelerated (prices were still going up, just at an increasingly slower pace) and the overall index didn’t go negative until March 2007, says Guntermann. "Those negative percentages are increasing every month," says Guntermann.

"In other words, the rate of decline on a moving 12-month basis is accelerating. The next numbers could be worse." Actual home prices peaked in the Valley of the Sun in July 2006, according to the ASU-RSI. Since then, the market turned ugly very quickly for Phoenix metro’s Southeast, Northwest and Southwest regions, with home prices dropping 7.7 percent, 9.1 percent and 10.7 percent, respectively, over the next 14 months.

Price volatility

ASU-RSI individually tracks the larger cities in the Valley of the Sun and judging from the data, some of these continue to be volatile in terms of housing prices. Mesa, for example, suffered mightily in the last recession, with home prices dropping 8 percent in January 1990. This contrasts to the city’s most active period in October 2005 when home prices were moving upward at an amazing 45 percent annual rate.

As of September 2007, Mesa home prices, as a percentage change from the prior year, were down 8.3 percent. From an actual pricing peak in September 2006, home prices have declined over 8 percent in Mesa. Back in early 1990, the most volatile city in the Valley of the Sun was Glendale, with home prices plummeting 16.5 percent in January of that year (as compared to the same period the year before), 16.0 percent in February and 11.4 percent in March.

Things were not great in September 2007, but not as bad as then. The ASU-RSI report shows Glendale witnessed a 7.1 percent drop from the same month the prior year. The ASU-RSI data reports no major city in the Valley of the Sun has so far experienced double-digit annual declines. The closest is Sun City/Sun City West, where housing prices fell 9.3 percent from the September 2006 to September 2007 period, but swooned close to 13 percent from the peak of March 2006.

Asked what he guesses the Phoenix housing market will look like going forward, Guntermann answers, "except for the Northeast region, which should continue in a flat situation, the trend in the data indicates more decline. There is nothing in the data that indicates a turnaround. We are not past the bottom. The decline in housing prices is expected to continue."

He adds, more temperately, "other than the cities of Phoenix, Scottsdale and Paradise Valley, the rates of decline are accelerating, which is not good news for owners and sellers, but does make housing attractive to prospective buyers. To keep things in perspective, the declines are still small compared to the 40-plus percentage rates of appreciation registered in the fall of 2005."

The W. P. Carey School's Center for Real Estate Theory and Practice presents the conference "Risk, Reward and Real Estate: Remembering the Past, Facing the Future," on February 22, 2008 in Phoenix, Arizona. Nationally-recognized industry experts, real estate professionals, and academics will discuss current issues in real estate.