ASU-RSI: Phoenix home prices continue 'unprecedented' decline

December 16, 2008

Housing prices in Phoenix continued their downward march in September, extending a record string of declines that started 19 months ago.

Home prices fell 28 percent this September compared with the same month last year, according to the Arizona State University-Repeat Sales Index (ASU-RSI). Preliminary data compiled for the index, a highly regarded barometer of the regional housing market, indicate that the trend is continuing, with projected declines of 30 percent in October and 31 percent in November.

Karl Guntermann, the Fred E. Taylor professor of Real Estate at the W. P. Carey School of Business, called the extended decline in prices "unprecedented." Since the July 2006 peak of the regional housing market, prices measured by the ASU-RSI have declined over 30 percent.

"When lenders were issuing subprime mortgages, the thought was that house prices will never go down, at least not for an extended period of time," says Guntermann, who oversees the ASU-RSI index. "Everyone thought that was the floor. Of course it wasn't."

A decline in the decline

While the market clearly has not hit bottom, we may be getting closer to it, according to Guntermann. Although prices are falling, the rate of decline is itself declining, and could be flat in a matter of months, Guntermann says.

"To me, that would be the good news," he says. "Year over year, the rate of change of prices are going to bottom out at around 30 percent. I expect that to happen sometime next year."

This does not mean that prices will have bottomed out, Guntermann cautions. "That rate has to go back up to zero before we can say that."

Unlike most popular indices, which compare median home prices, the ASU-RSI index tracks repeat sales of the same house. The use of repeat sales data is considered the most reliable way to measure price fluctuations in a housing market because the house "quality" issue remains constant.

The ASU-RSI tracks very closely to the S&P/Case-Shiller Index for Phoenix since the same methodology is employed for calculating both indices.

Affordability helps the market

Guntermann, who prepares the ASU-RSI each month with research associate Alex Horenstein, finds other encouraging news in the latest data on affordability. At the peak of the housing boom in 2006, the affordability index in Phoenix was 75, which means that a household earning the median income had only 75 percent of the income needed to buy a median-priced house.

In the third quarter of this year, the affordability index in Phoenix had climbed to 126, which means that a family with a median income now has 126 percent of the income needed to buy a median priced home.

While affordability is obviously positive for buyers, it also is good news for the market generally because it can lead to more sales and stronger prices.

"A correction in the market will come about partly with improvement in affordability," says Guntermann. "You can't say that it will bail us out, but affordability is one of several factors."

Rising together, falling separately

The ASU-RSI index divides the Phoenix metropolitan area into five different regions and also follows trends in seven different cities. The S&P/Case-Shiller index does not have such a breakdown and considers the Phoenix metropolitan area as one unit.

The ASU-RSI data show that while the market went up in a generally uniform fashion in all areas of metropolitan Phoenix during the most recent boom, it is coming down at different rates in different places:

  • The more affluent Northeast region (Carefree, Cave Creek, Fountain Hills, Paradise Valley and Scottsdale), down 18.2 percent,
  • The Southwest (Avondale, Buckeye, Goodyear, Litchfield Park), down 38.3 percent,
  • The Northwest (El Mirage, Glendale, Peoria, Sun City, Sun City West, Surprise and Youngtown), down 31.9 percent,
  • The Southeast cities (Apache Junction, Chandler, Gilbert, Higley, Mesa, Queen Creek, Sun Lakes and Tempe), down 25.7 percent, and
  • Central Phoenix, Down 29.8 percent.

"The West side has been traditionally the lower income, lower priced housing part of the city," says Guntermann. "One reason for the big declines in the Southwest and Northwest is that a lot development had taken place there."

New developments in the outlying areas tend to be less desirable than homes closer to the central city, according to Guntermann. An important factor is that commuting times are much longer for homes in the periphery, he notes.

As prices have fallen for the more desirable homes, buyers have opted for those properties, putting downward pressure on prices in outlying regions. A spike in foreclosures in these areas intensifies the downward spiral.

"Foreclosures don't occur evenly throughout the area. They cluster, and they are clustering in somewhat more in the Southwest and Northwest," Guntermann says.

An historic market decline

For the region as a whole, the housing market plunge this time has clearly eclipsed the collapse of the early 1990s. In 1990 and 1991, prices fell for 17 straight months. This time, the streak is 19 already and almost certain to continue for at least two more months.

The price declines also are much more dramatic and widespread this time. From 1989 to 1991, prices fell only 3.2 percent in the Central region, but dropped 32.4 percent between 2006 and 2008. In the Southwest region, prices have fallen 45.4 percent this time vs. 21.2 percent in the early 1990s. In other cities and regions, the percentage declines have been three, four, and even five times greater in this housing recession.

"The current weakness in the housing market not only exceeded the duration experienced in the early 1990s but the magnitude of the declines exceeds those from the earlier period in all regions and cities," the ASU-RSI report states.

The hard fall that began 19 months ago is to a large extent a result of the extraordinary spike in prices that occurred three and four years ago, according to Guntermann. Between September 2004 and September 2005, prices jumped 44 percent in greater Phoenix.

"The more excess you have on one side or the other in a market, the more likely you are to swing the other way as you work back to some kind of balance," Guntermann says.