ASU-RSI: Phoenix home prices decline by double digits

June 18, 2008

There's trouble in paradise -- housing troubles to be exact. In March, for the first time ever, home prices in the overall Phoenix metro area declined by double digits.

The Arizona State University-Repeat Sales Index (ASU-RSI), which looks back three months to March, showed average home prices dropped 13 percent, a sharp difference from the 9.3 percent drop reported in February.      

This current downturn is often compared to the last great real estate recession that walloped the Phoenix metro area in the early 1990s, says Karl Guntermann, professor of real estate at the W. P. Carey School of Business. Guntermann puts together the ASU-RSI with research associate Alex Horenstein.

"Back then the most severe month-to-month decline occurred in February 1990 with a then-record decline of 5 percent. In this downturn, the Phoenix metro first passed that number back in October 2007 when home prices declined by 5.4 percent."

"We've established six straight dubious records since then," says Guntermann.

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. The ASU-RSI scrubs the data differently, however, dropping transactions with sale prices less than $5,000 and where homes increased more than 60 percent annually.

The accelerating, sharp downward pitch of home prices has a lot to do with foreclosures and distressed real estate coming back into the market, Guntermann said.

"In the middle of the decade, a lot of borrowers were steered to newly-introduced mortgage products such as option-ARMs (a 30-year, adjustable-rate mortgage offering the borrowers payment options such as interest-only)," he explained. "These mortgage products started re-adjusting (interest rates moving upward) in 2007, as have the next generation of ARMs. The higher interest rates resulted in bigger mortgage payments and that has forced a number of homeowners into foreclosure situations."

After lenders get back the single-family asset, they do what they can to quickly ready it again for sale, often establishing a new price that has been severely discounted. "Some of what we are seeing today are these foreclosures coming back on the market," says Hornstein.

The irony of the distressed real estate process is that the banks don't want to foreclose, because a foreclosed property ends up as an REO (real estate owned) -- an asset held on the books as a loss and eventually causing havoc to financial statements. Too many REOs and the lender faces problems with its risk-based capital requirements. Banks have been very slow to foreclose, but they have had to and these properties are now being sold at a discount to purchase price.

"A similarly large increase in the rate of decline in house prices occurred in most regions and cities in the Phoenix metro area," says Guntermann.

ASU-RSI divides the Phoenix metro area, into five regions: Northeast (Carefree, Cave Creek, Fountain Hills, Paradise Valley and Scottsdale); Northwest (El Mirage, Glendale, Peoria, Sun City, Sun City West, Surprise and Youngtown); Central (Phoenix); Southwest (Avondale, Buckeye, Goodyear, Litchfield Park); and Southeast (Apache Junction, Chandler, Gilbert, Higley, Mesa, Queen Creek, Sun Lakes and Tempe).

The downward trend was so strong it even took the air out of the Northeast sector, which was relatively stable, showing, at worst, a moderate decline of 2.4 percent in February (as compared to February 2007). By March, the Northeast sector experienced home price declines of 4.3 percent (as compared to March 2007).

That was still much better than all other sectors, yet when the decline for even the pricier homes starts accelerating, says Guntermann, "it suggests that house prices have a long way to decline, and things will get worse before they get better."

All sectors fared poorly, but Central Phoenix metro caught a severe downdraft. From March 2007 to March 2008, home prices collapsed 14.4 percent, much worse than the 7.5 percent decline in February 2008 (as compared to February 2007). For the other Valley of the Sun regions, the Southeast was down 13.8 percent in March, a small decline from 11.1 percent in February. Northwest dropped 19 percent in March,  from 16.2 percent in February. Finally, the Southwest deflated 22.9 percent in March, compared to 17.9 percent in February.

Again, in comparison to the last real estate recession, today's numbers are strikingly grim:

  • From 1989 through 1992, Central region home prices inched downward 3.2 percent; from 2006 through 2008, home prices splattered 15.8 percent.
  • From 1989 through 1992, Southeast home prices drifted 7 percent; from 2006 through 2008, home prices swooned 18.5 percent.
  • From 1989 through 1992, Northwest home prices fell off 15.3 percent; from 2006 through 2008, home prices nosedived 22.1 percent.
  • From 1989 through 1992, Southwest home prices tanked 21.2 percent; from 2006 through 2008, home prices deflated 26.50 percent.

Only in the Northeast has the trend line reversed. From 2006 through 2008, home prices have been off 7.4 percent, which is slightly better than the situation back in 1989 through 1992, when home prices slid 9.7 percent.

Drilling down on a city-by-city basis, the data is mostly coincidental except for two highlights.

Sun City/ Sun City West reported home price declines of 11.2 percent in March, but that was better than the 13.7 percent of February.

"Sun City/Sun City West was one of the first cities in the metro area to experience a weakening market for homes," says Guntermann. "Maybe, we are finally seeing some stabilization."

The only other city that did better in March as compared to the month before was Chandler, off 9.2 percent -- better than the 9.4 percent of February. Glendale, Mesa, Peoria, Scottsdale/Paradise Valley and Tempe all fared worse in March than the month prior.

"One of the data's surprises referenced Tempe, which had not been greatly affected by the housing crunch due to the presence of Arizona State University and its central location," says Guntermann. "In February, home prices were down 8.6 percent, but by March they fell 12.1 percent, comparable to Mesa (down 13.3 percent) but worse than Chandler in the Southeast Valley."