ASU-RSI: Duration of real estate price decline matches the 17-month record

October 20, 2008

Back in the early 1990s, the Phoenix metro area -- like the rest of the country -- was suffering through a profound real estate recession and house prices declined for a record 17 straight months. Like Lou Gehrig's record for consecutive games played, it was thought it would never be equaled. But, the latest data for July shows a larger decline from one year prior, making it the 17th month in a row home prices have declined in the Valley of the Sun.

"This recession is much broader than the real estate recession that began in the late 1980s; this one involves the financial sector in a more prominent way," observes Karl Guntermann, the Fred E. Taylor professor of Real Estate at the W.P. Carey School of Business. Guntermann compiles the Arizona State University-Repeat Sales Index (ASU-RSI) along with research associate, Alex Horenstein.

"Problems stemming from the securitization of mortgages have spread to broader credit markets making this a more serious downturn," Guntermann adds. "Plus, this recession is much more severe, the price declines are deeper and that suggests it will take a lot longer to recover."

The July ASU-RSI, which compares July home sales against sales in July 2008, shows that house prices in the Valley of the Sun slumped 24 percent. From June 2007 to June 2008, home prices declined 23 percent and from May 2007 to May 2008, the decline was 21 percent.

The reporting of the data used to compute the ASU-RSI lags by three-months, so Guntermann also charts the data that is used as an indicator of future housing price direction. As he sees it, the Valley of the Sun is on target to break the record for house price declines. He expects August home sales to drop –26 percent and September –27 percent.

"It's going to be a long time before we get back to where prices are flat from a year ago," Guntermann notes.

Encouraging words?

Most popular indices, such as those developed by the National Association of Realtors, track median home prices but 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 Horenstein, because the house "quality" issue remains constant. In other words, since repeat sales compare the prices of a single house against itself, the numbers are not skewed by comparing 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. The ASU-RSI, however, scrubs the data differently, dropping transactions with sale prices less than $5,000 and where homes increased more than 60 percent annually.

A positive spin on the July data would be that earlier in 2008 prices were declining at an increasing rate while recent data shows only moderate changes in the rate: just 1 percent from the June to July indices. As Guntermann, notes, "the double-digit rates of decline that began in March are leveling off."

Anecdotally, it appears investors are starting to return to the market, perhaps thinking that prices are getting closer to the bottom. Also, potential homebuyers who couldn't afford to purchase in past years are now finding prices more affordable. On the other hand, the severity of the on-going credit crisis means it is increasingly difficult to find mortgage money. The end result is incidents of actual deals are not frequent enough to stem the ebbing tide of home prices.

Before the current losing streak ends, home prices will get very close to annual declines of 30 percent, says Guntermann.

"One of the reasons home prices are still going lower is the continuing increase in foreclosures," he explains. "The foreclosure data doesn't show any signs of changing direction. More foreclosed properties add to the supply, which itself pushes down prices relative to demand. Also, lenders tend to discount foreclosed properties in order to get rid of them quicker."

Still heading down …

One thing to consider is this: from January 2004 to July 2006, Phoenix metro house prices increased 76 percent, with the biggest monthly jump of 44 percent coming in September 2005. The median price of a Phoenix area home peaked in July 2006 at $263,000, says Guntermann. As of July 2008, the median price had fallen to $190,000, which Guntermann says is actually where prices should be if one takes into account long-term trend data.

"We are still heading down," adds Guntermann. "We'll overshoot the trend line in the other direction and eventually that will turn around and then we'll oscillate back and forth before once again becoming consistent with historical data on median home prices in the Phoenix area."

ASU-RSI divides the Phoenix metro area into five regions, and all but one reported July numbers that were worse than June. The region bucking the trend was the Northeast (Carefree, Cave Creek, Fountain Hills, Paradise Valley and Scottsdale), which was flat.

Data from other metro regions includes:

  • The Southwest (the cities of Avondale, Buckeye, Goodyear and Litchfield Park), where July numbers dropped 35.8 percent as compared to the 34.3 percent drop in June;
  • Northwest (El Mirage, Glendale, Peoria, Sun City, Sun City West, Surprise and Youngtown), falling 28.4 percent versus -27.0 percent;
  • Central (Phoenix), where prices dropped 25.6 percent versus –23.3 percent in June; and
  • Southeast (Apache Junction, Chandler, Gilbert, Higley, Mesa, Queen Creek, Sun Lakes and Tempe), where prices fell 23.7 percent versus –22.4 percent in June.

Individual city data usually parallels the regional numbers in that home prices in most Valley of the Sun cities move in the same direction on a monthly basis. But, for the first time all year, a split is opening. Three cities sported worse numbers in July as compared to June, while four cities notched improved tallies.

The good news cities included:

  • Peoria, down 27.7 percent in July, compared to 28.1 percent in June;
  • Sun City/Sun City West, falling 15.2 percent in July and -15.4 percent in June;
  • Scottsdale/Paradise Valley, down 13.7 percent in July, but -14 percent in June;
  • Tempe, falling 13.1 percent in July and –13.2 percent in June.

On the laggard list were:

  • Glendale, down 29.3 percent in July, up from 27.4 percent in June;
  • Mesa, down 24.9 percent in July, up from 23.3 percent in June, and
  • Chandler, down 20.5 percent in July, up from 20.1 percent in June.