ASU-RSI: Record breaking fall in Phoenix market continues

Real estate expert and finance Professor Karl Guntermann has been predicting for a long time that the decline in Phoenix area home prices would probably bottom out by the end of 2008. But, after November's report showed a 32 percent decline and projections for December and January looking grim as well, even Guntermann is scratching his head in dismay. "I thought as late as last month things were going to bottom out," Guntermann notes, "but the rate of decline is still going south." In fact, he added, it may take another year to get the rate of decline to zero.

Real estate expert Karl Guntermann has been predicting for a long time that the decline in Phoenix area home prices would probably bottom out by the end of 2008. But, after scrutinizing the latest data from November, and projecting forward for December and January, even Guntermann is scratching his head in dismay.

A professor of real estate and finance at the W. P. Carey School of Business, Guntermann has seen his forward guesstimates blown-up. "I thought as late as last month things were going to bottom out," Guntermann notes, "but the rate of decline is still going south." In fact, he added, it may take another year to get the rate of decline to zero. Guntermann and researcher Alex Horenstein compile the monthly ASU-RSI (Repeat Sales Index).

The most recent numbers from the ASU-RSI (November 2008 over November 2007) show house prices dropped by 32 percent in the Phoenix metro. Preliminary data signal declines of 33 percent in December and 34 percent in January 2009. The median price of Phoenix metro houses, which had fallen to a very weak $160,000 in October, declined even more in November to $150,000, according to the ASU-RSI.

"That puts the median house price in the Phoenix area back to the level of October 2003, prior to the start of the boomcycle," notes Guntermann, the Fred E. Taylor professor of Real Estate at the W. P. Carey School of Business. The preliminary data for December and January could turn even mild Arizona into a frozen tundra of concern. Guntermann estimates that when the median home prices in Phoenix metro for December are reported, they will have slumped to $139,000.

And the decline won't stop there, with home prices deflating to the $130,000 level in January. The last time, the Valley of the Sun experienced numbers that low was in January 2001. "I expected the numbers for December and January to be flat or maybe even a little less negative," says Guntermann, "but the problems plaguing the Phoenix area residential market haven't eased.

Foreclosures are continuing at high rates, the economy is weak, jobs aren't being created and people aren't moving in. In Arizona, a lot of the demand for housing comes from growth and in-migration. There's no job formation and people just aren't moving here." 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. In terms of home prices, appreciation for the Valley of the Sun peaked in September 2005 at a 44 percent annual rate.

From January 2004, which Guntermann considers the start of the hyper-appreciation cycle for the Phoenix metro, home prices increased by 76 percent, until topping out in July 2006. Since then, the ASU-RSI has declined over 36 percent in total between 2006 and 2008. That actually may be the only good news: the Phoenix metro hasn't given back all the appreciation on a price point level.

But drilling down into the various cities and regions in the Phoenix metro, the data turns to bleak once again. The ASU-RSI divides the "Valley of the Sun" into five geographic sectors. The most dire numbers continue to come from the southwest: the cities Avondale, Buckeye, Goodyear and Litchfield Park.

Last month, the southwest region became first to hit the –40 percent level. And in November (this measure compares November 2007 with November 2008), declines in housing prices pitched downward again 41.8 percent. Here's the most frightening part for Southwest metro citizens: from 2006 through 2008, declines in home values reached 49.3 percent.

"As house and land prices went up in the Phoenix metro during the boom, builders moved further out to create homes that were affordable," explains Guntermann. "And the southwest region extends very far from Central Phoenix to places like Estrella and Buckeye. Many of the buyers for those homes had lower income and weaker credit. Today, foreclosures are a big problem out there, driving prices down even more."

With home prices dropping so steeply in the core of the Phoenix metro, the more desirable locations closer-in will attract the next wave of buyers, making home price problems further out on the environs, such as in the far Southwest sector, deeper and more intransigent, Guntermann adds.

For the same two-year period, the only other sector to pass the –40 percent mark was the northwest (El Mirage, Glendale, Peoria, Sun City, Sun City West, Surprise and Youngtown), which experienced home price declines of 41.8 percent.

In descending order of severity, Central (essentially all of Phoenix) drooped 38.2 percent; southeast (Tempe, Mesa, Gilbert, Chandler, Apache Junction, Higley, Queen Creek and Sun Lakes) slipped 34.9 percent; and Northeast (Carefree, Cave Creek, Fountain Hills, Paradise Valley and Scottsdale) contracted 23.7 percent. As for the cities, from 2006 through 2008, the only major cities in the Phoenix metro to pass the –40 percent mark include Glendale at –41.4 percent and Peoria at –40.9 percent.

Two cities have passed the –30 percent level: Mesa at –36.7 percent and Chandler at –33 percent. Also weak: Sun City/Sun City West at –28.8 percent, Tempe at –24.6 percent and Scottsdale/Paradise Valley at –22.8 percent. "Prices are going to continue to decline, certainly throughout the year," predicts Guntermann. "Hopefully, the rate of decline will slow or even bottom out. Based on what's happening in the economy, locally and nationally, to get the rate of decline to zero could take another year."