ASU-RSI: Phoenix area single-family market improving — not so in townhouse/condo sector

Single-family home prices in the Phoenix metro market have finally stopped diving, but the townhouse/condominium segment of the market continues to sink, according to the latest ASU Repeat Sales Index (ASU-RSI). Finance professor Karl Guntermann, who compiles the index with research associate Adam Nowak, reports that home prices declined 28 percent in July compared to July 2008, continuing a welcome moderating trend that started a few months ago. But analysis of townhouse/condominium data — a new feature of the ASU-RSI — shows that drop prices in that sector is still gaining speed.

Single-family home prices in the Phoenix metro market have finally stopped diving, but the townhouse/condominium segment of the market continues to sink, according to the latest ASU Repeat Sales Index (ASU-RSI). The ASU-RSI is reporting that home prices declined 28 percent in July compared to July 2008, continuing a welcome moderating trend that started a few months ago.

Year over year prices dropped 31 percent in June and 33 percent in May. The picture is different for the townhouse and condominium market. This month, the ASU-RSI debuts a separate index that looks at this sector. "Attached units represent a significant portion of the housing market," said finance professor Karl Guntermann, who compiles the ASU-RSI with research associate Adam Nowak.

"Data for townhouse/condo sales back to January 1989 has been used to estimate an index using the same repeat sales methodology as we use for the single-family market."

Townhouse and condominium market

This first data analysis shows that prices in the townhouse/condo market continue to decline at an increasing rate, plummeting 36 percent in July 2009 compared to July 2008. That's a faster rate than the 33 percent price decline for June and the 31 percent slip in May, Guntermann said. Popular indices such as those developed by the National Association of Realtors measure median home prices.

The ASU-RSI, however, 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, explained 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.

It is much like using same store sales in retail. 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.

"Part of the problem driving condo prices lower is that these days it so much harder to get a mortgage on a condominium than on a single-family residence," says Guntermann. "To an investor, the factors affecting the single-family investment are more individual as to market, neighborhood and house. But, in a townhouse/condominium, the factors are project-wide," said Guntermann.

"To some extent what happens to your condo investment depends not only on the unit, but also what happens in the whole project, especially if the project is half full or less." Another problem for the townhouse/condo market is that the median price at the low end of the single-family market is about the same. "Part of the demand is being drawn away to these foreclosed properties," he added.

Single-family sector

The overall median price for single-family transactions hit $125,000 in July, up from $122,000 the month before. Also, preliminary data on median prices for August and September predict median sales prices of $126,500 and $130,000, respectively.

But, Guntermann says, this doesn't mean Phoenix is out of the woods. A second wave of foreclosures is likely to hit the national market in 2010. "From the data I'm seeing, a lot of adjustable-rate mortgages will be resetting next year," says Guntermann.

Dynamics of the market's poles

Finally, the July Index highlights a wide separation in changing house prices between the have and have-not cities. Three cities have experienced immense declines in average prices in the three years since the July 2006 peak: Mesa, -50.2 percent; Peoria, -52 percent; and Glendale, -56 percent.

These numbers compare with the relatively moderate price drop-offs in Scottsdale/Paradise Valley, -32.3 percent; Sun City/Sun City West, -35.2; and Tempe, -35.6 percent Two cities sit in between the best and worst performing cities: Chandler with home prices falling 41.5 percent and Gilbert, down 45 percent. "Chandler and Gilbert are newer suburban cities and still developing," says Guntermann.

During the expansion of the real estate bubble, builders pushed out from these cities, to the fringe where land was cheaper and houses could priced for less. As a result, Guntermann explained, many of the buyers who were at the margins financially were attracted to those farther-out neighborhoods, and less to closer-in Chandler and Gilbert.

Mesa, Peoria and Glendale are also experiencing new developments, but they are more mature cities with older neighborhoods at their core, Guntermann explained. These older neighborhoods were attractive to less qualified buyers, who were able to get mortgages when sub-prime loans were proliferating, but find themselves challenged to make payments now that the market is down. Each of the metro area's remaining three cities is a special case, Guntermann explains.

In Sun City/Sun City West, a high proportion of retiree homeowners bought with cash so they weren't highly leveraged when the crash hit. Tempe is buoyed by Arizona State University and the fact that is centrally located with no more room for expansion. Finally, Scottsdale/Paradise Valley is a higher-end market that suffered less in the crash as compared to medium- and lower-priced Phoenix metro home markets.