Research

ASU-RSI: Extreme appreciation in Phoenix real estate gone — all gone

The extreme appreciation that thrilled Phoenix area residents who bought their homes in the period just before the run up is gone — all gone. But the downward slide isn't over yet. The median price of Phoenix metro houses declined to $160,000 in October 2008, according to the latest data from Arizona State University - Repeat Sales Index (ASU-RSI). "That puts the median house price back to the level of March 2004, close to the start of the current cycle," notes finance an real estate Professor Karl Guntermann. "If the median house price drops below $150,000, we would be back before the cycle began," he added. Apparently, that is where the Phoenix metro is headed.

2009-01-16

The extreme appreciation that thrilled Phoenix area residents who bought their homes in the period just before the run up is gone — all gone. But the downward slide isn't over yet. The median price of Phoenix metro houses, which had declined to $174,500 in September 2008, dropped to $160,000 in October 2008, according to the latest data from Arizona State University - Repeat Sales Index (ASU-RSI).

"That puts the median house price back to the level of March 2004, close to the start of the current cycle," notes Karl Guntermann, the Fred E. Taylor professor of Real Estate at the W. P. Carey School of Business and the researcher who assembles the ASU-RSI.

"January 2004 was the month when Phoenix home prices started climbing at double-digit rates of appreciation, so if the median house price drops below $150,000, we would be back before the cycle began." Apparently, that is where the Phoenix metro is headed.

The slide continues

Because ASU-RSI data lags real time by three-months lag, Guntermann also charts selected data that is used as an indicator of future housing price direction. As he reads the tea leaves, Phoenix area house prices for November should dip to $150,000 and in December touch down at $140,000. "That would put prices back to the levels of October 2003 and April 2002, respectively, essentially eliminating all appreciation in house prices from the current cycle," says Guntermann.

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 portents for the Phoenix metro housing market are not good. The October 2008 data reveals home prices declined by over 30 percent for the first time. Throughout 2008, Guntermann had been predicting the annual rate of decline would bottom out around 30 percent, but now he thinks the bottom will end up between 30 and 35 percent.

The big difference between the start of 2009 compared to heart of 2008 the economy. "Normal appreciation rates are harder to predict because so much now depends on the economy," says Guntermann. "Regardless of what is happening in terms of housing affordability, regardless of housing prices as compared to the beginning of the cycle, in terms of what is going to happen in the future, the 900-pound elephant in the room is the economy."

No place to hide

In 2008, discussions about the Valley of the Sun housing markets were mostly about the sector itself. For example, the market watched as an increasing number of foreclosure properties came back into the market, drawing down average home prices. "What's come about in the past few months is a greater realization as to how bad the economy really is and how long the downturn is going to last," says Guntermann.

"People are losing their jobs. It is not just a matter of people with foreclosures adding their houses to the market because they were upside-down on their investment or took a bad mortgage. Now you have people that had all that straight, but have lost their jobs. At some point they will have to sell their homes or go into foreclosure. That's an added element on the supply side."

Unfortunately, there is really no place left to hide. High-end corporate positions as well as basic retail jobs have disappeared, and that is reflected in Valley of the Sun housing data. For most of 2008, the ASU-RSI data showed housing prices in the Northeast sector (Carefree, Cave Creek, Fountain Hills, Paradise Valley and Scottsdale) sliding downward, but not egregiously.

In October, the Northeast jumped past the 20 percent mark for the first time, with a 21.5 percent decline in home prices (as compared to October 2007). And while Northeast home prices still look better than anywhere else in central Arizona, the precipitous decline from the month before — a 3.3 percent — drop was worse than all other sectors.

In comparing October 2008 to September 2008, Central (essentially all of Phoenix) slumped 3.2 percent; Southwest (Avondale, Buckeye, Goodyear and Litchfield Park) slipped 1.7 percent; Northwest (El Mirage, Glendale, Peoria, Sun City, Sun City West, Surprise and Youngtown) dipped 1.4 percent; and Southeast (Tempe, Mesa, Gilbert, Chandler, Apache Junction, Higley, Queen Creek and Sun Lakes) shrank 1.2 percent. "No part of the Valley of the Sun remains unscathed," says Guntermann. "The Northeast has joined the party."

Cityscape

On a city-by-city basis, the sudden weakness in the high-end market is equally apparent. Of the major Phoenix metro cities, Scottsdale/Paradise Valley experienced the biggest drop in housing prices, 3 percent, in October 2008, as compared to the prior month. This compares with Glendale (-2.6 percent); Mesa (-2.1 percent); Chandler (-1.7 percent); Peoria (-0.7 percent); Sun City/Sun City West, (-0.4 percent); and Tempe (-0.1 percent).

The rate of appreciation for the overall metro peaked in September 2005 at a 44 percent annual rate, with house prices increasing by 76 percent from January 2004 to July 2006. Since then the ASU-RSI has declined over 34 percent in total.

The most dramatic example of the housing slump can be seen in the data from the Southwest region, where home prices have plummeted 47.2 percent over the 2006 to 2008 time period. "Despite the fact that house prices are more attractive today," Guntermann observes, "there are fewer people in a situation to take advantage of the pricing decline."

Real Estate Faculty