ASU-RSI: Phoenix metro real estate decline accelerates

Like an object dropped over the side of a high building, housing prices in the Phoenix metro area picked up speed on the way down, reports Karl Guntermann, real estate professor at the W. P. Carey School of Business. Guntermann puts together the Arizona State University–Repeat Sales Index (ASU-RSI).

Like an object dropped over the side of a high building, housing prices in the Phoenix metro area picked up speed on the way down, reports Karl L. Guntermann, real estate professor at the W. P. Carey School of Business. Guntermann puts together the Arizona State University–Repeat Sales Index (ASU-RSI).

The January ASU-RSI report shows that from October 2006 through October 2007, the overall decline in house prices across the Phoenix metro area, known informally as the Valley of the Sun, plummeted 4.6 percent, a slightly harsher slump than the –3.8 percent in the 12-month period from September 2006 to September 2007.

Negative numbers for all component parts

Demonstrating the severity of the housing problem in the Phoenix metro area, all individual cities and regions have dropped into the negative category in terms of rates of change in house prices. "The January report represents a 12-month moving average for the period October 30, 2006 through October 30, 2007," explains Guntermann.

"The ASU-RSI data goes back to January 1990 and the –4.6 percent represents the biggest decline in housing prices over a 12-month period since the February 1989 to February 1990 period, when home priced dropped 5.01 percent, during the last real estate recession." Most popular indices, such as those developed by the National Association of Realtors, measure median home prices. The ASU-RSI index, however, 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 the house "quality" issue remains constant. In other words, since repeat sales compare the prices of a single house against itself, the numbers don't incorporate different homes with different "quality" factors.

The ASU-RSI tracks very closely to the S&P/Case-Schiller Index for Phoenix since the same methodology is employed for calculating both indices. However, the ASU-RSI scrubs the data differently, dropping transactions with sale prices less than $5,000 and where homes increased more than 60 percent annually.

The good, the bad and the ugly

On a Valley of the Sun regional basis, the best performing areas were the Central Valley, essentially all of Phoenix, and the Northeast Valley, made up of Carefree, Cave Creek, Fountain Hills, Paradise Valley and Scottsdale, both of which had an annual change from October 2006 to 0ctober 2007 of slightly more than –1 percent. "House prices in the Northeast and Central regions have held up well relative to other parts of the metro area," notes Alex Horenstein, an ASU research associate who helps formulate the data for the ASU-RSI report.

In contrast, from October 2006 to October 2007, housing prices dropped 11.1 percent in the Southwest region, a grouping that includes Avondale, Buckeye, Goodyear and Litchfield Park; 9 percent in the Northwest region, consisting of the cities El Mirage, Glendale, Peoria, Sun City, Sun City West, Surprise and Youngtown; and 8 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.

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 as 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 didn't go negative until March 2007, says Guntermann.

"Those percentages are increasing every month," says Guntermann. "In other words, the rate of decline on a moving 12-month basis is accelerating." Actual home prices peaked in the Valley of the Sun in mid-2006, and according to the ASU-RSI, since then for the Phoenix metro's Southeast, Northwest and Southwest regions, the market turned ugly very quickly with average home prices dropping 9 percent, 10 percent and 11 percent, respectively.

ASU-RSI individually tracks the larger cities in the Valley of the Sun and each of these municipalities peaked at different times. The most interesting development in the current data is that all municipalities are now experiencing average home price depreciation. "For the first time all cities and regions are underwater as compared to a year ago," says Guntermann. "Scottsdale/Paradise Valley was running counter to the trend, flat to up slightly, but even that municipal grouping has gone negative, although slightly at 1.5 percent.

A glimmer of light

While this is the first decline for Scottsdale/Paradise Valley since January 2007, there was a glimmer of optimism in the otherwise gloomy Valley of the Sun numbers. For Chandler, Mesa, Glendale and Peoria, says Horenstein, the price changes (all in the -7 percent to -8 percent range) reflected in the October 2007 numbers were essentially unchanged for the last three months — an indication of stabilization. The rate of decline for Tempe has similarly stabilized at -3 percent.

At the other end of optimism curve sits Sun City/Sun City West, where the October rate of decline in house prices accelerated from 9.3 percent (September 2006 to September 2007) to 11.7 percent (October 2006 to October 2007). When considering the decline in housing prices from a period of peak appreciation, Sun City/Sun City West also holds the distinction of reporting the most dismal performance, down 15.3 percent from March 2006 when prices peaked.

For the other major cities: Chandler off 10.1 percent from its July 2006 peak; Peoria down 8.9 percent from its April 2006 peak; Mesa dropped 8.7 percent from its September 2006 peak; Glendale declined 7.8 percent from its December 2006 peak; Tempe drooped 5.7 percent from its July 2006 peak; Phoenix dipped 2.1 percent from its November 2006 peak; and Scottsdale/Paradise Valley down 1.5 percent from its October 2006 peak.

"The implication of all this is," says Guntermann, "to the extent that home prices continue to decline, homeowner equity is much smaller than it was and that makes it more difficult to refinance."

Bottom Line:

• 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
• House prices in the Northeast and Central regions have held up well relative to other parts of the metro area.
• Hardest hit is the Southwest region, a grouping that includes Avondale, Buckeye, Goodyear and Litchfield Park.
• To the extent that home prices decline, home equity will be smaller and it will be more difficult to refinance.

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.