ASU-RSI: Preliminary data offer glimmer of hope for plunging Phoenix home prices

April 28, 2009

Arizona real estate markets tend to swing wildly. During boom periods, home prices accelerate precipitously, but when the bubble bursts, residential values sometimes slink all the way back to the price level at the start of cyclical upturn.

However, the tend line is much different in this recession. Things are actually much worse as housing prices in the Phoenix metropolitan area have overshot the beginning of the cycle mark, according to the latest data (January) from the Arizona State University-Repeat Sales Index (ASU-RSI).

The upswing in Phoenix metro home values began in earnest in January 2004, reports Karl Guntermann, the Fred E. Taylor Professor of Real Estate at the W. P. Carey School of Business and the researcher who puts together the ASU-RSI along with research associate Alex Horenstein. "But, the median price for a Phoenix house is now down to $130,000, the same as it was in January 2001. That's way back before the beginning of the cycle."

The median house price in the Phoenix metro peaked at $262,500 in 2006. In addition, the rate of appreciation for the overall metro topped off in September 2005 at a 44 percent annual rate with house prices surging 76 percent from January 2004 to July 2006.

The reporting of the ASU-RSI data carries a three-month lag, so Guntermann also charts selected data that is used as an indicator of future housing price direction. As he reads the preliminary numbers, home prices could slump to $121,000 in February and $120,000 in March, which would push prices back to the level of April and March 1999, respectively.

"Markets over-react," says Guntermann. "Optimism pushed prices well above the long-term trend line for appreciation, and when the market corrects, like it is doing, it goes too far in the other direction."

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.

While the news of home value does seem to be grim, there are also nuggets of hope in the preliminary ASU-RSI data as well. In January, home prices declined by 35 percent. Preliminary numbers show home prices will drop 37 percent in February and then 36 percent in March.

That 1 percent slackening in March may not be much, but if the data holds up then it would be the first time in 25 months home price declines would be at a slower rate rather than at a faster rate. If that trend line stays consistent for a couple of months, it would finally indicate a turnaround on house prices, says Guntermann. "Until now, there has been nothing in the data to give us a sign of optimism, or hope."

Before an index can get back to zero, which means prices have been flat on a year-to-year basis, they need to start declining at a slower rate, which may be happening, Guntermann adds.

When the January ASU-RSI is parsed for regional and municipal numbers, readers tend to get a similar mix of optimism and doubt.

The ASU-RSI divides the Phoenix metro into five sectors, all of which showed equally abysmal declines on a year-to-year basis. (ASU-RSI figures represent a price comparison of January 2009 versus January 2008) The two sectors which the most profound declines were the Southwest (Avondale, Buckeye, Goodyear and Litchfield Park) and Central (Phoenix) regions, which were off -43.4 percent and -41.4 percent, respectively.

In descending order of severity follows the Northwest (El Mirage, Glendale, Peoria, Sun City, Sun City West, Surprise and Youngtown), drooping 35.7 percent; Southeast (Tempe, Mesa, Gilbert, Chandler, Apache Junction, Higley, Queen Creek and Sun Lakes) slipping -34.9 percent; and Northeast (Carefree, Cave Creek, Fountain Hills, Paradise Valley and Scottsdale) contracting -25.1 percent.

"On a regional basis, we don't appear to be bottoming out," Guntermann observes. Yet, if one dives deeper into the numbers there may be a hint of less turbulent times ahead.

Things look better on a municipal basis as three of metro area's seven major cities (other than Phoenix) are showing signs of price decline moderation.

 In Chandler, falling prices have eased -- as compared to the prior month -- for three months straight, touching -24.4 percent in January and better than the -25 percent in December. Tempe also experienced softening home price declines for three months; reporting in at -15.7 percent, a spiffier number than the -16.5 percent in December.

Finally, Glendale also looked better in regard to home prices over the past two months. While its -36.3 percent home price decline in January was the worst drop of any Phoenix metro city, that was still better than the -37.8 percent decline in the prior month.

Still reporting more severe price declines on a month by month comparison were Peoria, -34.8 percent (versus -33 percent in December); Mesa, -33.7 percent (versus -31.9 percent); Scottsdale/Paradise Valley, -24.5 percent (versus -22.1 percent; and Sun City/Sun City West, -16.7 percent (versus -15.2 percent).

This may be an indication of the Phoenix metro housing market beginning to split into haves and have-nots, says Guntermann, "where in certain areas prices are going to decline slower but others are still seeing declines at a faster pace."