ASU-RSI: Phoenix home prices plummet in April

The overall price decline for the Phoenix metro housing market took a dramatic, 18 percent leap downward in April, which was unsettling since March numbers were already very weak. Part of the problem has been a wave of foreclosures hitting the market; this tends to dramatically impact average housing prices, says Karl Guntermann, a professor of real estate at the W. P. Carey School of Business.

The overall price decline for the Phoenix metro housing market took a dramatic, 18 percent leap downward in April, which was unsettling since March numbers were already very weak. Part of the problem has been a wave of foreclosures hitting the market; this tends to dramatically impact average housing prices, says Karl Guntermann, the Fred E. Taylor professor of real estate at the W. P. Carey School of Business.

Guntermann and research associate Alex Horenstein compile the Arizona State University-Repeat Sales Index (ASU-RSI). The April ASU-RSI report, which compares April 2008 home sales against the same month the year before, shows significantly sharper rates of decline from one year ago than was reported this past April. For the overall Phoenix metro area, home price declines hit double digits for the first time ever in March when they fell 13 percent from prices in March 2007.

April then roared in with a troubling 18 percent off-the-cliff drop in home prices compared to April a year ago. 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 impact of foreclosed properties

Guntermann attributes the changes in the April ASU-RSI to the banks finally getting more of their foreclosed properties back into the market. Often lenders will take a big loss just to get the properties off the books, and that magnifies an already bad situation. "In Phoenix you have a metro area where home prices are sliding down, then all of sudden more discounted properties are thrown into the market," he says. Foreclosures are now about 20 percent to 30 percent of all sales, Guntermann adds.

"When foreclosures were 5 percent, they showed up a little bit in the data, but at 20 percent, that's large enough where it is going to have significant impact." When a home becomes a foreclosure property, the banks eventually turn around and sell it at a much lower price, but it takes a while for the banks to get a handle on what are essentially broken loans, Guntermann says.

"At the start, there is a 90-day notice, and once the banks get them back, the residences often have to be cleaned up — those infamous green pools, etc. That takes time. Sometimes it is a full year before the banks get these homes back on the market." Where foreclosures appear to have had the biggest impact has been in the Southwest region of the Valley of the Sun, where April declines were the most severe, at 30.6 percent. The Southwest was already the weakest link in the metro area, with home prices falling 22.9 percent the month before. It now becomes the first region to top 30 percent in home price declines.

"Foreclosures tend to cluster," says Guntermann. "When big parts of subdivisions go into foreclosure, that has a strong ripple effect on values all the way around. In the Southwest region, there was a lot of development out on the fringe, places that hadn't seen much development before. The homes were relatively cheap, but being so far out, they are in some regards less desirable than homes closer to Phoenix. These are homes people walk away from."

Phoenix prices by region

ASU-RSI divides the Phoenix metro area into five regions; the Southwest is made up of the cities of Avondale, Buckeye, Goodyear and Litchfield Park. Other regions include the 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); and Southeast (Apache Junction, Chandler, Gilbert, Higley, Mesa, Queen Creek, Sun Lakes and Tempe).

The Northeast sector delivered the second big shock in the April data, where home price declines reached double digits for the first time with a drop of 10.2 percent. The weakening of the Northeast market was extreme considering that home price declines there were just 4.3 percent in March. On a consecutive month comparison, only the Southwest region experienced a greater percentage drop, 7.7 percent.

The Central, Southeast and Northwest regions all reported consecutive month home price declines in the 4-plus percentage range. On a city basis, a surprise of the positive kind could be found in Sun City/Sun City West. Home price declines in April were 14.2 percent, which placed among the cities experiencing less weakness than others.

Scottsdale/Paradise Valley home prices eased 10 percent, while in Tempe the price of a house dropped 14.2 percent. In most of the prior ASU-RSI reports over the past six months, Sun City/Sun City West usually was either the number one or two city in terms of home price declines. "Sun City/Sun City West went down a lot earlier than other cities," says Guntermann. "We can't tell yet whether the city is stabilizing or is in a pause."

Resilient cities now hit hard

The April data for Valley of the Sun cities poses a dilemma for those trying to discern trends, because the communities that showed considerable resilience in the face of a the declining economy and credit crisis are now catching up to cities that for months had been taking a beating.

Back in March, Chandler and Scottsdale/Paradise Valley were the two cities in the Phoenix metro where homes price declines were the least severe, off 9.2 and 4.1 percent, respectively. In April, on a comparative basis to other Valley of the Sun cities, Chandler and Scottsdale/Paradise Valley still were performing decently: Chandler home prices declined 15 percent and Scottsdale/Paradise Valley drooped 10 percent.

When comparing home price declines between March and April, however, the differences were much greater in Chandler and Scottsdale/Paradise Valley than all other major cities — a 5.8 percent difference for Chandler and 5.9 percent for Scottsdale/Paradise Valley. That's a trend line that bears watching.