ASU-RSI: Economic malaise slowing arrival of real estate relief

Malaise in the economy is slowing down the arrival of relief for Phoenix real estate and lengthening what is already a record-breaking run of declining prices, according to an analysis of the Arizona State University-Repeat Sales Index (ASU-RSI). The rate of decline had been showing signs of leveling off last fall, but then the financial crises hit, further injuring the limping market, said Finance Professor Karl Guntermann, who compiles the index with research associate Alex Horenstein. Home prices in the metro-Phoenix area dropped 33 percent in 2008, and in January and February prices are projected to drop even more. Prices have been declining for 22 months now, exceeding the previous record: a 17-month plunge in prices between 1989 and 1991.

Malaise in the economy is slowing down the arrival of relief for Phoenix real estate and lengthening what is already a record-breaking run of declining prices, according to an analysis of the Arizona State University-Repeat Sales Index (ASU-RSI). The index reports that home prices in the metro-Phoenix area dropped 33 percent in 2008.

In January and February prices are projected to drop even more, with the year-over-year comparison showing declines of 35 and 36 percent respectively. Prices have been declining for 22 months now, exceeding the previous record: a 17-month plunge in prices between 1989 and 1991.

The rate of decline had been showing signs of leveling off last fall, but then the financial crises hit, further injuring the limping market. "It appeared that the rapid, double-digit rates of decline that began in March 2008 was slowing, but uncertainty in the financial markets last fall and the accelerating decline in the U.S economy are just starting to be reflected in the RSI," said Karl Guntermann, a professor of finance and real estate at the W. P. Carey School of Business.

Because of the drag from the sluggish economy, "it probably will be several months before the decline in the index levels off, which would be the first step is ending the decline in house prices." Guntermann and research associate Alex Horenstein compile the ASU-RSI, which uses a methodology similar to the national S&P/Case-Shiller Home Price Index to track trends in housing prices in the Phoenix Metropolitan area.

The run up of housing prices in Phoenix metro started in January 2004 and the annual rate of appreciation peaked in September, 2005 at 44 percent. By July 2006, home prices had increased by 76 percent, but since then, the overall ASU-RSI has declined 40 percent. The median price is now well below what it was when the bubble began to inflate in 2004.

"The median home price dropped to $139,000 in December — from $150,000 in November — rolling prices back to the level of September, 2001. That was well prior to the start of the current cycle in January 2004," Guntermann said. If the trend holds, the median price will be $130,000 in January and $120,000 in February — a median price not seen since March 1999.

Zooming in

The ASU-RSI divides the Phoenix metro area into five regions. All five regions showed similar dramatic increases in house prices from January 2004 to their 2006 peaks (74 – 81 percent), but their total price declines vary widely. The Southwest is down the most since the peak — over 51 percent.

This region includes the "boom" cities on the fringes of the metropolitan area, including Avondale, Buckeye, Goodyear and Litchfield Park. On a city-by-city basis, rates of decline in house prices comparing December 2007 to 2008 ranged from 15 percent in Sun City/Sun City West to 38 percent in Glendale:

• In Sun City/Sun City West, the annual decline in the index has been in the range of 13 to 15 percent for over a year. While prices are still declining, at least the rate of decline in that area appears to have stabilized.
• In Tempe, the rate of decline in December (16.5 percent) was noticeably less that the 19 percent drop recorded in November.
• Glendale saw prices fall 37.8 percent in December, slightly up from November's dip of 36.6 percent.
• In Chandler, Peoria and Scottsdale/Paradise Valley, December's price declines were essentially the same as November. The December numbers are: 25 percent in Chandler; 33 percent in Peoria; and 22.1 percent in Scottsdale/Paradise Valley.

Where's the bottom?

Guntermann calls the housing cycle that began in January 2004 "extraordinary." Beginning in January 1990 and continuing through the end of 2003, the annual rate of change in housing prices gradually increased until it reached approximately 7 percent in 2002-2003. Then the rate of price increases climbed steeply, topping out at 44 percent annually in 2005.

"This clearly was not sustainable," Guntermann commented. "It is not surprising that prices are now declining at double digit annual rates." But what's next? Guntermann extended the old trend of approximately 7 percent price increase per year through December 2009. In July 2008, housing prices in Phoenix metro crossed the trend line on its way further down.

The July 2008 median home price was about $191,000 — the price that would have occurred had there been no bubble. In December the median price was $139,000 — far below the peak median price of $262,500. Given the continuing downward trajectory, Guntermann sees prices falling even further. Then the index must level off and achieve a zero percent change when compared to the prior year. "Only then will the market have bottomed out," Guntermann said.

How it's done

Repeat sales data is the best way to track market trends, Guntermann explains, because it eliminates the need to control for the many variables (such as the characteristics of the house, location, demographics, etc.) in a diverse housing market. The ASU-RSI is similar to the Case-Shiller Index, although the data is cleaned slightly differently.