ASU-RSI: Phoenix home prices continue their descent

The fall in housing prices continues, with the latest data from the ASU Repeat Sales Index (ASU-RSI) showing that in June home values had dropped 22.8 percent compared to June 2007. That makes four months of double-digit declines in year-over-year price comparisons. The only bright light is that the rate of decline is slowing.

Phoenix area housing prices have been riding a long, downward-sloping wave for 16 straight months, and the descent doesn't appear to be over yet. According to the latest report based on the W. P. Carey School's Repeat Sales Index (ASU-RSI), home prices again experienced a larger rate of decline than that of the month before.

The latest data, for June 2008, shows a larger drop in home values than was reported for May 2008, reports Karl Guntermann, the Fred E. Taylor professor of Real Estate at the W. P. Carey School of Business. Guntermann puts together the ASU-RSI along with research assistant Alex Horenstein. "The overall metro decline from June 2007 to June 2008 hit 22.8 percent," says Guntermann.

"That compares to –21.2 percent from May 2007 to May 2008, and –18.4 percent from April 2007 to April 2008. March was the first month with a double-digit rate of decline, indicating the deterioration in the housing market that began accelerating last spring and hasn't let up." The only good news in the numbers is that the rate of decline appears to be moderating. "The slowing in the rate of decline, if it holds in future months, is a good sign," says Guntermann.

"The housing market will have bottomed out in terms of price when the rate of decline from one year ago is zero." 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.

Where's the bottom?

The question hanging on everyone's lips is how much longer will Phoenix area homeowners have to wait before home prices stop falling? It's a question Guntermann is often asked and since he doesn't run forecasting models, it's a question that in the past he has tried to avoid answering. However, Guntermann recently began charting the data as an indicator of when local housing values will stabilize.

Guntermann used median housing prices from 1989 to 2003, and that produced a trend line in a graph that sloped upward at moderate angle. The trend was then projected, as if conditions had been 'normal,' through 2009. For example, if the median price for a home was $75,000 in 1989 then it should have risen to about $200,000 by 2009. Guntermann overlaid the trend line with one showing actual Phoenix house prices over the period 1989 through June 2008.

In comparison, the two lines more or less overlapped until 2004 when actual home prices diverged dramatically, accelerating into higher prices ranges at a steep angle. Median home prices for the Phoenix metro peaked in June 2006 at approximately $262,000. By mid-2007, actual Phoenix home prices began slipping. On the graph this shows up as a steep slope equal to the one illustrating home price rises in 2004 and 2005.

In June 2008, median home prices dropped to approximately $210,000, still above the trend line, which was at $190,000 for the same month. Guntermann expects the median home price trend line and actual Phoenix house price movement to graphically intersect late in 2008 or early 2009, which, he says is approximately where house prices would have been without the big run-up in 2004 and 2005.

The drop in actual home prices won't necessarily stop when it hits the median home price trend line, but could overshoot it, Guntermann cautions. Even if that happens, home prices would eventually get back close to the long-term trend. "If the economy is weak and if financing remains a problem," Guntermann adds, "that could cause actual home prices to fall below the median home price trend line, at least temporarily."

At that point, the difference between actual home prices and the median trend line is not so much a market imbalance as it is a problem caused by the broader economy and financial markets. "At some point, when home prices continue to go down, the fundamentals of supply and demand get into balance and the market is at bottom," Guntermann explains. "If you still see prices going down, then you have to ask yourself, what else is going on in the economy."

The core achieves cachet

There was one surprise in the June data, as reported by the ASU-RSI. As could be expected, all the major Valley of the Sun cities lying beyond the Phoenix border showed rates of decline in June that were worse than May except for one — Tempe. From June 2007 to June 2008, Peoria led all Valley of the Sun cities in price declines, dropping 28.1 percent, which was a steeper drop than the 26.9 percent from May 2007 to May 2008.

Data for other cities shows:

• Glendale home prices collapsed 27.4 percent from June 2007 to June 2008 (down 26.0 percent from May 2007 to May 2008);
• Mesa home prices sank 23.3 percent (down 21 percent from May 2007 to May 2008);
• Chandler home prices dropped 20.1 percent (declining 17.8 percent from May 2007 to May 2008); and
• Sun City/Sun City West was off 15.4 percent (down 14 percent from May 2007 to May 2008).

For the past year, the best performing city has been Scottsdale/Paradise Valley, which slid 14 percent from June 2007 to June 2008. That was still worse than the 12 percent decline from May 2007 to May 2008. However, the new best-performing city is now Tempe, which was off just 13.2 percent from June 2007 to June 2008 — better than Scottsdale/Paradise Valley.

In addition, it was the only Phoenix metro city that did better than the month before, when Tempe home prices shifted down 14.7 percent from May 2007 to May 2008. "In widespread metro areas like the Valley of the Sun, the exurbs eventually lose their cachet and more central locations become attractive," explains Guntermann. Tempe traditionally has been considered a suburb, but it appears that it is now moving out of that category. "Tempe is now a central location," Guntermann said.