ASU-RSI: Phoenix home prices down more than 20 percent from 2007

The Phoenix metro area housing market is closing on a record. And unlike the Olympics this has more to do with losing than winning. Back in the 1990 to 1991 years, during the last serious real estate recession that roiled Arizona, house prices on a 12-month basis declined for 17 straight months. "Now at 15 months of declining home prices, the current weakness in the housing market is approaching the duration experienced in the early 1990s," reports Karl Guntermann, the Fred E. Taylor professor of Real Estate at the W. P. Carey School of Business. Guntermann and research associate Alex Horenstein put together the Arizona State University-Repeat Sales Index.

The Phoenix metro area housing market is closing on a record. And unlike the Olympics this has more to do with losing than winning. Back in the 1990 to 1991 years, during the last serious real estate recession that roiled Arizona, house prices on a 12-month basis declined for 17 straight months.

"Now at 15 months of declining home prices, the current weakness in the housing market is approaching the duration experienced in the early 1990s," reports Karl Guntermann, the Fred E. Taylor professor of Real Estate at the W. P. Carey School of Business. Guntermann and research associate Alex Horenstein put together the Arizona State University–Repeat Sales Index.

The May ASU-RSI report, which compares May home sales against the same month the year before, shows the 15th straight month of decline in house prices was accomplished in a grand manner, with the overall rate of decline jumping to a whopping –21 percent.

This compares to the April ASU-RSI report (April 2008 home sales matched to April 2007 home sales), which showed house prices dipped –18 percent. What makes these numbers from the last two months so much more dramatic is the realization that although home prices have been deteriorating for over a year, March 2008 was only the first month in this cycle with a double-digit rate decline (–13 percent).

ASU-RSI methodology

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 Horenstein, 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.

Getting worse more slowly — that's the good news

About the only good news to be seen in the May ASU-RSI numbers, says Guntermann, is that on a consecutive month basis, the rate of decline has slowed from a month ago. From April to May, home prices in the Phoenix metro, known locally as the Valley of the Sun, slipped –3 percent. In comparison, from March to April, home prices zipped downward at a –6 percent clip.

t would be nice to say the slowdown in home price declines is a trend, but it could be just a bounce, Guntermann notes. "Next month we could be back to –6 percent. We may be hitting the bottom of the market where change in the rate of decline moves slowly and in small increments on a month-to-month basis." One could only hope. The decline in prices has been going on for a near record length of time and for most of that period, the changes on a month-to-month basis were –1 percent or less.

The first big drop was November to December 2007 when prices declined by more than –3 percent, then the market returned to the –1 percent range for the next two months. The last three months, however, have been particularly cruel to the Phoenix area with home prices falling in the Valley of Sun –4.4 percent from February to March, –6 percent from March to April and now –3 percent from April to May.

The numbers: regions and cities

What does all that mean to the various Phoenix metro regions and cities? ASU-RSI divides the Phoenix metro area into five regions: the Southwest (the cities of Avondale, Buckeye, Goodyear and Litchfield Park); 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).

All five regions showed dramatic increases in house prices (ranging from 73.5 percent to 80.6 percent) from January 2004 to their peaks in 2006. Obviously, much of that largesse, which was granted to the Phoenix metro by an over-heated housing market, is slowly being reversed. The most serious problem is in the Southwest, where home prices are down –37.6 percent from peak.

Other regions generously giving back price gains to the tune of more than 20 percent include the Northwest, –29.5 percent; Southeast, –25.2 percent; and Central, –23.3 percent. So far, the only region remaining below the 20 percent mark is the Northeast, down –14.1 percent. Among the major cities in the Valley of the Sun, Peoria, which is located in the Northwest, has been hit the hardest, off –30.9 percent from peak.

After Peoria come a bunch of cities where home prices have receded over 20 percent: Glendale, –28.9 percent; Mesa, –25.1 percent; Chandler, –23.3 percent and Sun City/Sun City West, –22.3 percent. Managing to hold on to more of the gains earned in the 2004-2006 years were Tempe, with home prices down –16.5 percent, and Scottsdale/Paradise Valley, –14.2 percent.

No relief in sight

"Houses are selling," says Guntermann. "If houses weren't selling, prices would be declining at an even faster pace. There is enough demand to keep things from getting worse." The problem is, Valley of the Sun homes are moving because lenders are putting foreclosed properties back on the market in ever increasing numbers.

Generally, foreclosed homes are heavily discounted; as a result foreclosures are keeping the local housing market fluid, but the phenomenon does nothing good for price levels. Guntermann prefers not to be a tea-leaf reader, but he notes forward indicators are not positive. "The ASU-RSI lags the current market by three months," Guntermann explains, "but foreclosure numbers are reported with a one-month lag.

As we were releasing the ASU-RSI, I was looking at July data that estimated 35 percent of all homes sold in the Phoenix metro were in foreclosure. That is a very high number, which leads me to believe ASU-RSI home price declines won't ease up any time over the next couple of months."