ASU-RSI: Drop in Phoenix real estate prices breaks infamous record

In the late 1980s home prices in Phoenix declined for a grueling 17 straight months before bottoming out in the early 1990s. That downturn pummeled the savings and loan industry, and it set the record for length. In August, however, this dubious record was broken when home prices in Phoenix declined for the 18th straight month, according to the latest data from the Arizona Sate University – Repeat Sales Index (ASU-RSI).

In the late 1980s home prices in Phoenix declined for a grueling 17 straight months before bottoming out in the early 1990s. That downturn pummeled the savings and loan industry, and it set the record for length. In August, however, this dubious record was broken when home prices in Phoenix declined for the 18th straight month, according to the latest data from the Arizona Sate University – Repeat Sales Index (ASU-RSI).

The August ASU-RSI report, which compares August homes sales against August 2007, indicated house prices slumped 26 percent. From July 2007 to July 2008, the decline was 24 percent. "This time around we've had a bigger crash," says Karl Guntermann, the Fred E. Taylor professor of Real Estate at the W. P. Carey School of Business and the researcher who puts together the ASU-RSI along with research associate Alex Horenstein.

"And the most apparent reason for that was that the country experienced a bigger housing bubble, certainly much greater than in the 1980s. The bigger the bubble, the more severe the downturn." During the bubble, Phoenix area home prices inflated 75-80 percent, says Guntermann.

How low can you go?

Guntermann doesn't expect the record setting decline to end in August. Analyzing the data that is used as an indicator of housing price direction, Guntermann estimates September home prices will drop 28 percent and in October 29 percent.

"As the Phoenix market weakens alongside the national economy that means fewer people moving to Arizona, which translates to fewer people to lift the demand for housing," says Guntermann. "The other problem is, banks are selling off foreclosed properties and the banks dramatically discount those homes, which aggravates the downturn."

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.

By every measure, the current collapse of the residential real estate market has surpassed the prolonged property downturn of the 1980s-1990s. Using some the major Phoenix metro communities as indicators, the depth of this real estate downturn as compared to 20 years ago is apparent:

• From 1989 through 1991, Glendale suffered the biggest drop in home prices, 19.6 percent, of all Valley of the Sun cities. For the years 2006 through 2008, home prices dropped an astounding 35.1 percent.
• For the years 1989-1991, Peoria fared decently with home prices dropping 7.3 percent. From 2006-2008, Peoria experience a fate was that was excruciatingly similar to that of Glendale's: home prices deflated 36.3 percent.
• From 1989-1991, Mesa saw a 10.9 percent decline, which compares favorably with the 31.8 percent drop between 2006 and 2008.
• Sun City/Sun City West also had a bad time in 1989-1991, with home price dropping 10.5 percent. From 2006-2008, the rate of decline more than doubled to 24 percent.
• Chandler and Scottsdale/Paradise Valley experienced moderate hits to their home markets during the 1989-1991 period, dropping 7.6 percent and 9.7 percent, respectively. Neither of the cities was as lucky this time around. From 2006-2008, Chandler suffered a 28.4 percent hit while Scottsdale/Paradise Valley housing prices eroded 17.9 percent.
• Back in 1989-1991, Tempe was the one city to avoid any real estate downturn, as home prices eased a mere 1.9 percent. From 2006-2008 there was no escape for Tempe as home prices drooped 18 percent.

The positive

Things definitely look bleak for Phoenix area homeowners, but Guntermann sees some positive signs — most importantly that the month-to-month declines are coming at a decreasing rate. Early in 2008, he says the declines on a month-to-month basis were actually increasing, which was very scary for homeowners. Homeowners still want to know where the bottom is and how much their houses will be worth, says Guntermann.

"I can't see the bottom in price, but I can see the bottom in the rate of decline, which will probably end up to be around 30 percent." At that point, home price declines should start to improve, Guntermann adds. "Then once that rate of decline hits zero, the Phoenix market will have finally bottomed out. But don't get your hopes up, that's not on the near horizon."