ASU-RSI: A late spring for real estate prices?

According to the latest ASU-Repeat Sales Index (ASU-RSI), overall house prices declined by 13 percent in December compared to December 2008, an improvement over the 17 percent year over year decline seen in November and the 20 percent decline in October. Karl Guntermann, a professor of real estate at the W. P. Carey School of Business and author of the index, reported that preliminary estimates for January and February show declines in single digits: 9 and 7 percent respectively. If the trend continues, residential real estate prices will finally level off later this spring, ending a dive that has lasted twice as long as the last real estate slump, in the early 1990s.

If the trend continues, residential real estate prices will finally level off later this spring, ending a dive that has lasted twice as long as the last real estate slump, in the early 1990s. According to the latest ASU-Repeat Sales Index (ASU-RSI), overall house prices declined by 13 percent in December compared to December 2008, an improvement over the 17 percent year over year decline seen in November and the 20 percent decline in October.

Karl Guntermann, a professor of real estate at the W. P. Carey School of Business who authors the index with research associate Adam Nowak, reported that preliminary estimates for January and February show declines in single digits: 9 and 7 percent respectively.

"The rate of decline has been slowing for several months, and if the present trend continues prices will level off later this spring," Guntermann said. Overall, house prices have fallen 47 percent from the mid-2006 peak, with homes at the low end of the price scale falling 57 percent and higher priced properties declining 39 percent. The median price for the overall market in December was $132,500, down from $135,000 in November. January and February are expected to come in at $125,000 and $127,000 respectively.

"The declines in the estimates for the latest three months reverse the upward trend that began last April but may reflect only a seasonal slowdown in the housing market," Guntermann said. "While price declines are unwelcome news to homeowners, those median prices are within the $120,000 to $135,000 range that has persisted since last summer." The ASU-RSI is different from many real estate indices because it compares sales prices for individual houses.

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.

Drilling down

Parsing the market by price, the December-over-December numbers showed that lower-priced homes fell 14 percent compared to the prices of more expensive houses. Prices at the lower end have been falling much more rapidly than expensive homes, but in January both are expected to fall 10 percent.

According to the report, during the five months ending in February the decline for lower-priced homes slowed from 30 percent to 5 percent — "a dramatic slowdown," in Guntermann's words. Dividing the market between foreclosure-related transactions and traditional transactions, it appears that the drop in prices for foreclosures may be near the end.

With prices on foreclosure-related homes declining 5 percent in December and anticipated to fall 2 percent in January and February, it appears that foreclosure market may be very close to bottoming out, Guntermann reported. "Foreclosed house prices peaked at an annual 32 percent decline in October 2008 and gradually slowed through last September, leading to the dramatic slowing that has occurred the past several months," Guntermann added.

Contributing to the leveling out of the foreclosure RSI are the substantial decline in prices that has occurred over the past two years, and recent increases in median prices that reflect increased demand from first-time buyers and investors. In contrast, prices for non-foreclosed homes continued to fall at about the same rate that they have since October, 2008. This segment fell 16 percent in December, and are expected to drop 17 percent in January and 18 percent in February.

Following that pattern, the median price in December for foreclosed houses was $120,000, up 25 percent from its low in May, with preliminary estimates for January and February of $115,200 and $115,000 respectively. For non-foreclosed houses, on the other hand, the median price was $160,000 in December with preliminary estimates of $155,000 for both January and February, continuing what has been basically a long-term trend of declining prices.

The townhouse/condo RSI slowed by 26 percent in December, compared to 28 percent in November. January and February are expected to be weaker, however, coming in at 28 and 30 percent. "It appears that the most rapid declines — 36 percent — occurred last summer, but the best that can be said about townhouse/condo prices is that the rate of decline appears to be stabilizing at around 30 percent per year," Guntermann said.

The median price of townhouse/condo units was $84,600 in December with forecasted medians the next two months of $80,000 and $86,400. Viewed region-by-region, slight up and down changes in the monthly rates continued. "In terms of total declines from the 2006 peak, the Southwest is down the most, 53 percent, but even in the Northeast prices have dropped 37 percent," Guntermann wrote.

"Of the five regions, the RSI for the Northeast has not hit bottom, which is a necessary first step before price appreciation is even possible, since the annual change in prices is based on the year-to-year change in the index." The other four regions could turn positive later this summer, he added, but for the Northeast that change is not likely until much later in the year. Among the cities, the annual rates of declines are now all below 20 percent, Guntermann reports, and Gilbert is in single digits at 8 percent.

Glendale and Peoria are the only cities with total declines still over 50 percent compared to the 2006 peaks. And, the RSI for Scottsdale/Paradise Valley and Sun City/Sun City West continues to decline. "While prices in most cities may stop declining later this summer, at this time there is no way to estimate when the decline will end for Scottsdale/Paradise Valley and Sun City/Sun City West," according to Guntermann.