Change in trajectory for declining Phoenix real estate prices?

The start of 2008 in the Phoenix metropolitan area was not much different from the end of 2007, as housing prices continue to decline. The only good news is that the rate of decline in January was slower than the huge drop in prices experienced by the Phoenix metro area in December, reports Karl Guntermann, a professor of real estate at the W. P. Carey School of Business.

The start of 2008 in the Phoenix metropolitan area was not much different from the end of 2007, as housing prices continue to decline. The only good news is that the rate of decline in January was slower than the huge drop in prices experienced by the Phoenix metro area in December, reports Karl L. Guntermann, a professor of real estate at the W. P. Carey School of Business.

The Arizona State University – Repeat Sales Index (ASU-RSI) for January showed that home prices in January 2008 declined by 8.9 percent compared to January 2007. The index showed a decline from November to December 2007 of 3.6 percent but only a 1.1 percent decline from December 2007 to January.

"January continued the downturn in housing prices, but more slowly, more in line with what was going on in most of 2007," notes Guntermann, who developed the ASU-RSI with research associate Alex Horenstein.

"If the December rate of decline had continued in January, or shows up again in future months, that would suggest we are on an entirely different trajectory downward. We are still on a down trajectory, the question is, how bad is it?"

Rate of decline still less than rate of run-up

On a moving 12-month basis, price changes first turned negative in March 2007, and the rate of decline gradually accelerated throughout the year, until December when there was a large drop. Since July 2006, when home prices in the Phoenix metro peaked, prices have declined by over 11 percent, says Guntermann.

"While that looks bad, remember from January 2004 to July 2006, house prices increased by more than 76 percent across the entire metro, so the decline is still relatively small compared to earlier increases," Guntermann says. Unlike most popular indices, such as those developed by the National Association of Realtors that measure median home prices, 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 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 numbers: city by city

City numbers in January were disappointing, as the 12-month declines for the Central (Phoenix) region and the Southeast (Apache Junction, Chandler, Gilbert, Higley, Mesa, Queen Creek, Sun Lakes and Tempe) region reached 10 percent and 10.6 percent, respectively — the first time either of the two regions slipped into double digit declines.

While the numbers were not good for the Central and Southeast regions, the declines were moderate as compared to the rolling disaster west of Phoenix. The Southwest region — consisting of Avondale, Buckeye, Goodyear and Litchfield Park — slumped 14.6 percent in January 2008 as compared to January 2007.

The Northwest region — home to El Mirage, Glendale, Peoria, Sun City, Sun City West, Surprise and Youngtown — reported even worse numbers with home prices dropping 16.1 percent. Only one region, the Northeast (Carefree, Cave Creek, Fountain Hills, Paradise Valley and Scottsdale) has shown any sign of stability.

In December, this region reported a slight drop in home prices of 3 percent, but in January home sales were back to a more moderate 0.3 percent decline. Part of the problem on the west side of the metro area, particularly in the Northwest region, is that the largest city — Glendale — has been very hard hit by falling housing prices.

For Glendale, from January 2007 to January 2008, home prices declined by 17.1 percent. The next closest city in the Valley of the Sun was neighboring Peoria, where home prices dropped 14.9 percent. In the Northwest region, the decline in home prices has been accelerating rapidly, says Guntermann. "In November 2007, home prices on a moving 12-month basis fell 10.8 percent, then 13.7 percent in December, and now in January 16.1 percent."

The west side: history of housing sensitivity

The Glendale housing market has historically been volatile during periods of weak economic activity, Guntermann said. The last recession to scourge homeowners happened the late 1980s and early 1990s when Phoenix metro home prices radically collapsed. During the three-year period from 1989 through 1991, Glendale home prices plummeted 19.6 percent.

For the same period, only two other metro cities, Mesa (10.9 percent) and Sun City/Sun City West (10.5 percent) experienced double-digit home price declines. The current housing crisis has had a major impact on housing affordability. The dramatic increase in house prices from 2004 to 2006 far outpaced an increase in household incomes, which tend to rise very slowly.

This disparity caused housing affordability to decline drastically. An affordability index of 100 means a household earning the median income for the area can afford to buy a median-priced house at prevailing interest rates (perfect for home buyers). An index value of 125 means median income is 125 percent of the income needed to buy a median priced house (a good situation).

An index of 75 means just the opposite: a household earning the median income has only 75 percent of the income needed to buy the same median priced house (not beneficial to buyers). The slumping housing prices in the western sectors of the Valley of the Sun mean improved affordability. At the end of last year, Glendale sported an affordability index of 91 and Peoria came it at 95.

In comparison, Tempe’s affordability hit 71; Mesa, 84 and Phoenix, 88. The problems in the western regions of the Phoenix metro are related to the past homebuilding boom. Homebuilders seeking cheap land pushed further to outer environs, buying up cheap land in places like Surprise, El Mirage and Buckeye. Development followed.

From one perspective, these are the least desirable locations because they are furthest from the central core of the metroplex. Although the locales for new development might be quite stunning, the developments become undesirable for two reasons.

First, because of rising gasoline prices, commuting from those locations becomes costly. Second, as prices throughout the area soften, people who couldn’t afford to buy closer in a few years ago are more able to do so now. Guntermann concludes, "Demand is always weakest on the fringe."

Bottom Line:

• Housing prices in the Phoenix metro area declined in January, but at a lower percentage rate than December.
• January data showed 12-month declines for the Central and Southeast regions reaching 10 percent and 10.6 percent, respectively — the first time either has slipped into double-digit declines.
• The Southwest region slumped 14.6 percent in January 2008 as compared to January 2007.
• The Northwest region fared even worse with home prices dropping 16.1 percent.
• Scottsdale / Paradise Valley was the only area to show stability: in December this region reported a slight drop in home prices of 3 percent, but in January home sales were back in the black, up slightly at 0.7 percent.
• 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.