December real estate market softened, but 2011 may still be the transition year

Phoenix Metro home prices continued their decline in December, and are expected to keep dropping for the foreseeable future. "The housing market is softening and that trend is likely to continue for at least the next few months," says Karl Guntermann, professor of finance and real estate who compiles the Arizona State University-Repeat Sales Index (ASU-RSI). Guntermann offered some hope, however, that the market will mimic last year's pattern and eventually begin to tip up.

Phoenix Metro home prices continued their decline in December, and are expected to keep dropping for the foreseeable future. "The housing market is softening and that trend is likely to continue for at least the next few months," says Karl Guntermann, professor of finance and real estate who compiles the Arizona State University-Repeat Sales Index (ASU-RSI).

According to the latest ASU-RSI, preliminary data for December shows that housing prices dropped for another month, with the annual year-over-year rate accelerating slightly to -8 percent.

Market fundamentals

The overall median price for sales included in the December index was $114,000. That compares to $122,000 in November and $125,000 in October. Since June 2009, prices have swung between $122,000 and $135,000, pointing to the instability of the Valley housing market. According to Guntermann, if the December decline in prices is sustained with revised data, it signals an unwelcome change.

The RSI also finds that foreclosures continue to weigh on the market. The preliminary median price for foreclosed houses in December was $99,500, the first time it has been below $100,000 since May 2009. Foreclosure prices in December dropped 12 percent compared to December 2009.

"Foreclosures represent almost 60 percent of the sale pairs we use each month," Guntermann said. "Foreclosures will continue to represent a significant portion of house sales, which will continue to have a depressing effect on house prices." In contrast, the median price for non-foreclosure homes was $149,000 in December, compared to $155,000 in November and $148,000 in October.

Non-foreclosure prices have been declining at an annual rate of 9 percent-to-13 percent since March, with the exception of a 6 percent drop in October. December's 9 percent decline is the same as November's, which is good news when compared to sectors where the decline is accelerating.

Meanwhile, the median price for townhouse/condos in December was $63,500. That's similar to prices over the past several months, indicating that the long period of declines in that market is finally starting to show signs of stabilizing. Still, townhouse/condo prices have been falling at a rate of around 20 percent per year since March, and in December they declined by 20 percent again, according to the preliminary RSI data.

The ASU-RSI numbers also show that prices for less expensive homes continue to drop more sharply than for more expensive homes. The rate of decline for lower-priced houses increased in the preliminary December data to -11 percent, but the prices of more expensive houses dropped at the same rate, 6 percent, for the third consecutive month.

2011 could still be transition year

While home prices continue to fall, the rate of decline is slowing. In December 2008, prices had fallen by 33 percent over the year. By December 2009, prices fell by another 13 percent. Those declines came amidst the very worst of the Great Recession and the implosion of the Phoenix housing market.

Guntermann says that with the state's economy gradually recovering and foreclosures apparently past their peak, there's a very good chance that 2011 will be a transition year in the housing market. "(Last year) was a year where declines turned positive for several months followed by more declines," he says. "As prices turn positive in 2011, that will probably be the start of a trend toward a normal housing market, assuming the Phoenix economy continues to improve."

An improvement in the Valley's employment picture is one important step toward getting the housing market back to normal. While that improvement is expected to be slow throughout 2011, it is taking place. Earlier this month, the Arizona Commerce Authority reported that the state's seasonally adjusted unemployment rate for December remained unchanged at 9.4 percent.

Arizona generated 3,400 net nonfarm jobs in December. The private sector added 7,000 jobs, while the public sector lost 3,600. While December's job gains are much less than the state is used to seeing when compared to past economic recoveries, it's important to note that Arizona had posted job losses in the past two Decembers.

The regions

Breaking down the latest ASU-RSI numbers, except for the Southwest Valley, regional price declines in October were larger than in September. In the Southwest region, prices increased by 3.2 percent in October compared to a 1.8 percent gain in September. The largest price decline in October took place in the Northeast Valley, with a drop of 8.9 percent.

The Southeast region followed closely behind with an 8.6 percent decline. In terms of total declines from the 2006 peak, every region in the Valley is down at least 40 percent, with the Southwest down the most at more than 58 percent. Looking at prices within cities in each region, only Avondale showed appreciation from October 2009 to 2010.

Prices in that city were up 3 percent on a year-to-year basis. All major cities in each region that saw price drops, with the exception of Sun City/Sun City West and Gilbert, experienced October declines that were greater than those seen in the September ASU-RSI.

The cities seeing the largest rate of price declines in October were Tempe and Chandler at 15.1 percent and 11 percent, respectively. Compared to the Valley's housing peak in 2006, home price declines are still very large in all cities, from 40 percent in Scottsdale/Paradise Valley to almost 65 percent in Avondale. "Avondale is the only city showing price appreciation on a year-to-year basis," Guntermann says.

"The Southwest region was hardest hit by the downturn with a large percentage of foreclosures. Increased demand associated with the lower prices has led to relatively better price performance in the Southwest region. Chandler and Tempe are once again showing double-digit annual declines."

Methodology

The ASU-RSI uses the repeat sales approach, considered the most reliable way to estimate price changes in the housing market. Repeat sales eliminate the need to deal with many of the issues associated with a diverse housing market. Repeat sales can measure the change in price of the same housing units over time.

A large number of repeat sales over many years can be analyzed to develop a repeat sales index. The ASU-RSI tracks very closely to the S&P/Case - Shiller index for Phoenix, as both use the same methodology in calculating indices. The S&P/ Case-Shiller index has been developed for 20 metropolitan areas and is being used as a basis for trading housing futures contracts in 10 of those markets.

Cities included in the ASU-RSI regions:

• Northeast — Carefree, Cave Creek, Fountain Hills, Paradise Valley, Scottsdale
• Northwest — El Mirage, Glendale, Peoria, Sun City/Sun City West, Surprise, Youngtown
• Central — Phoenix
• Southeast — Apache Junction, Chandler, Gilbert, Higley, Mesa, Queen Creek, Sun Lakes, Tempe
• Southwest — Avondale, Buckeye, Goodyear, Litchfield Park