ASU-RSI: Phoenix housing prices continue to fall

Arizona's most severe real estate downturn began in the late 1980s and stretched deeply into the next decade. At the abyss, home prices in the state had declined (on a repeat-sale basis) for a record 17 straight months. The current economic slowdown has resulted in a similarly dreary stretch for Arizona homeowners. As of February, home prices had declined for 11 consecutive months and there is a good chance the state will surpass the old record set almost two decades ago, reports Karl Guntermann, professor of real estate at the W. P. Carey School of Business.

Arizona's most severe real estate downturn began in the late 1980s and stretched deeply into the next decade. At the abyss, home prices in the state had declined (on a repeat-sale basis) for a record 17 straight months. The current economic slowdown, caused by the subprime mortgage crisis of 2007 and the subsequent and ongoing credit crunch, has resulted in a similarly dreary stretch for Arizona homeowners.

As of February, home prices had declined for 11 consecutive months and there is a good chance the state will surpass the old record set almost two decades ago, reports Karl Guntermann, professor of real estate at the W. P. Carey School. Guntermann and research associate Alex Horenstein are the authors of the Arizona State University Repeat Sales Index (ASU-RSI).

The February ASU-RSI report, which compares February 2008 home sales against the same month the year before, showed home prices fell by 9.3 percent, the fifth month in a row that home price declines actually accelerated as compared to the prior month. In January, home prices dropped 8.9 percent; December, 8.6 percent; November, 5.8 percent, and October, 5.4 percent.

"The Arizona housing market was deteriorating gradually last year," says Guntermann, "and then shifted to a higher plateau in December, and we have stayed at that higher rate of decline since then. About the only good news is that the rate of acceleration has eased, although the market is still going in the wrong direction and will continue to do so into the near future."

Comparing apples to apples

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.

While the state still has a ways to go before matching the historic record of 17 straight months of price declines, in some regards the current downturn in the residential housing sector is more severe than the one experienced by Arizona homeowners in the early 1990s, says Guntermann.

Declines vary by region

ASU-RSI divides the Phoenix metro area into five regions: Northeast (Carefree, Cave Creek, Fountain Hills, Paradise Valley and Scottsdale); Northwest (El Mirage, Glendale, Peoria, Sun City, Sun City West, Surprise and Youngtown); Central (Phoenix); Southwest (Avondale, Buckeye, Goodyear, Litchfield Park); and Southeast (Apache Junction, Chandler, Gilbert, Higley, Mesa, Queen Creek, Sun Lakes and Tempe).

Three of those regions — Central, Southeast and Northwest — reported deeper house price declines in this recession than in the early 1990s. On a moving 12-month basis, Central home prices softened 3.2 percent during the 17-month downturn from 1990 to 1992, but already from 2006 to 2008, home prices have collapsed 10.1 percent. Southeast home prices weakened 7 percent from 1990 to 1992; in the 2006-2008 period the decline more than doubled, falling 15.5 percent.

Finally, Northwest home prices were stung by a 15.3 percent decline in the past recession, only to top that in 2006-2008 with 18.6 percent. The Southwest has so far managed to avoid showing worse numbers in this recession, but that's mostly because in this very volatile part of the metro region, home prices dropped 21.2 percent in the last recession. This time around the decline has been on par, with home prices shredded by -21 percent.

Only the Northeast region has escaped the onslaught. During the long 17-month decline in the last recession, home prices there slipped 9.7 percent; this time around the decline has been moderate, 5.4 percent. On a city-by-city basis, Chandler, Mesa, Peoria, Sun City/Sun City West and Tempe are all faring worse in this recession than the last. Scottsdale/Paradise Valley and Glendale are doing better.

While Scottsdale/Paradise Valley has been buoyed by the wealth factor in many of its neighborhoods, the only reason Glendale appears to be doing well this time through is that during the previous recession home prices in that city got crushed, falling 19.6 percent. The numbers look better for Glendale in this downturn, but it's all relative — the city's home prices shrank by 17.9 percent from 2006 through 2008.

The good news: rising affordability

On the brighter side, declining home prices mean residences are more affordable than they have been in years. "The dramatic increase in house prices from 2004 into 2006 far outpaced increases in household income, which tends to rise very slowly" Guntermann explains. "That disparity caused housing affordability to decline." However, with the drastic decline in home prices over the past 11 months, Phoenix metro housing now looks a lot more affordable.

The Affordability Index rating of 100 means a household earning the median income for the area can afford to buy a median-priced house at prevailing interest rates. An index value of 125 means that median income is 125 percent (a good thing!) of the income needed to buy a median-priced house while an index of 75 (not a good thing!) means just the opposite.

In that case a household earning the median-income has only 75 percent of the income needed to buy the same median-priced house. The first quarter 2008 Affordability Index shows two cities, Chandler and Peoria, have turned positive in regard to affordability, with scores of 108 and 102, respectively, reports Guntermann.

Meanwhile, three cities have moved closer to an affordability match, Phoenix (98), Glendale (97) and Mesa (93). Tempe and Scottsdale/Paradise Valley remain low on the affordability scale. To see how the Affordability Index works, a comparison of Chandler and Mesa reads like this: Median resale price for a home in Chandler stands at $242,000, but the price of a home for an affordability rating of 100 is $261,062, which means prices have declined more than necessary to achieve affordability.

On the other hand, Mesa's median resale price totals $205,000, but its price of a home for an affordability rating of 100 is $191,477. So, home prices in Mesa would need to decline another 7.1 percent to achieve affordability. (Since the total decline in Mesa's home prices has already reached 14.4 percent, the city is roughly two-thirds of the way back to achieving parity in housing affordability.)

If homes are affordable but still aren't selling, Guntermann cautions, that could indicate that other factors such as the availability of mortgage financing or concerns about job stability may be "bigger impediments to recovery in the housing market than the price of housing."