ASU-RSI: A slowing rate of decline equals good news

May 18, 2009

Phoenix metro real estate prices declined 37 percent in February compared to February 2008, but preliminary data for March and April show that the rate of decline may be slowing. "In this market, that would be considered good news," said real estate professor Karl Guntermann, who compiles the ASU-RSI (Arizona State University-Repeat Sales Index) with research associate Alex Horenstein.

February's year-over-year dip of 37 percent is up from the 35 percent decline in January and 33 percent in February. But, the preliminary price decline in March is expected to be "virtually the same" as the decline in February, Guntermann said, while estimates are pointing to a 34 percent decline in April. Guntermann cautioned that preliminary estimates often change, but the slowing pace of decline is encouraging.

As of February 2009, house prices had declined 44 percent from the peak of the market in July 2006, setting prices back a decade to the April 1999 level. The median price was $121,000 in February, compared to $130,000 in January. If the data substantiates projections, the median price will fall to $119,000 in March and $117,500 in April.

"Prices appear to be leveling off but with the large number of foreclosures selling at distressed prices, it is likely that prices won't show a clear trend for some time," Guntermann said. "The decline in the index may be slowing but it's still very negative, which isn't inconsistent with prices leveling off, since the index measures change from a year ago."

The Phoenix market suffered a recession in the 1990's as a result of the "excesses of the 1980s," Guntermann said, but "the current weakness in the housing market has not only exceeded the duration experienced in the early 1990s, but the magnitude of the declines far exceeds those from 1989-1992 in all regions." The current decline has lasted 24 months, compared to the 17-month slump of 20 years ago.

The ASU-RSI is distinct from indices such as the National Association of Realtors' report on median home prices because it 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. Repeat sales compare the price at which a single house has sold at different points in time, eliminating the distortion that might occur from comparing sales of homes that vary in size, location, amenities, etc.

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.

A regional view

The ASU-RSI divides the metro area into five regions for analyses.

The Central region (Phoenix) dropped the most year-over-year in February, coming in 44.3 percent lower. The fringe cities of Avondale, Buckeye, Goodyear and Litchfield Park, which comprise the Southwest region, fell 43.0 percent. The Northwest ( El Mirage, Glendale, Peoria, Sun City, Sun City West, Surprise and Youngtown) fell 38.1 percent. The Southeast (Apache Junction, Chandler, Gilbert, Higley, Mesa, Queen Creek, Sun Lakes and Tempe) followed at 30.0 percent, with the smallest declines, 26.5 percent, occurring in the Northeast (Carefree, Cave Creek, Fountain Hills, Paradise Valley and Scottsdale).

Comparing year-over-year numbers, the price decline was 4.4 percent higher in February than in January in the Central region; Northeast logged 3.4 percent; Southeast 2.7 percent, Northwest 4.8 percent and Southwest 3.7 percent. For all regions except the Northeast, however, the decline from January to February was smaller than the decline from December to January.

Taking top place for total declines in housing prices since the market peaked in 2006 is the Southwest region, falling a total of 55 percent. In order, the other regions fell 49.9 percent (Central), 49.6 (Northwest), 40.8 (Southeast), and 30.5 (Northeast).

City by city

Further evidence that this was a winter of discontent in the real estate market shows up in the city-by-city view.  

Comparing this February to February 2008, the decline in house prices ranged from 16.1 percent in Tempe to 39.5 percent in Glendale. At the relatively low end of the scale, Sun City/Sun City West dropped 18.4 percent -- the second month in a row that the Sun cities have dipped at this rate. For over a year, those cities had been dropping 13-15 percent.

In past months, Scottsdale and Paradise Valley have appeared to be least scathed by the total drop in prices since the peak. This month, however, it was Tempe's numbers, comparing present to peak, that came out the lowest: 27.3 percent down. In second place, Scottsdale/Paradise Valley dropped 29.5 overall.  

"Tempe is more centrally located, making houses there more desirable," Guntermann commented. "Also, Tempe doesn't have the numbers of foreclosures that are especially a problem in some of the outlying areas."

Concerning Scottsdale/Paradise Valley, Guntermann noted that these upscale communities were the last area to decline, but the drop across the metro area has been so dramatic that all cities are affected.  

Highlights of the city-by-city report:

  • Chandler: In February prices slid 25.8 percent from their February '08 level -- a 2.4 percent increase in the rate of decline compared to January. In the last real estate slump from 1989-92, prices in Chandler dropped 7.6 percent total. The current Chandler market has dropped 36.5 percent from its peak.
  • Glendale: At 39.5 percent, Glendale recorded the steepest decline in February's month-over-month price comparison. That's a 5.5 percent drop from January. Glendale has plummeted 50.3 percent since 2006, the most of any city. That's more than twice the 19.6 percent drop seen 20 years ago.
  • Mesa: Prices in Mesa dropped 34.8 percent in February compared to last year -- a 3.1 percent decrease from the month before. During the last housing recession, Mesa prices dropped 10.9 percent compared to 44.2 percent this time around.
  • Peoria: A drop of 36.7 percent in Peoria's prices resulted in a 4.9 percent increase in decline compared to January's numbers. Peoria 's overall price drop since 2006 was 49.6 percent. Last time around (1989-92) Peoria's prices slipped 7.3 percent.
  • Scottsdale/Paradise Valley: These cities have been experiencing the smallest declines of all the metro cities. In February their prices slid 25.5 percent compared to February 2008, a 3.3 percent increase in rate of decline compared to January. All told, Scottsdale/Paradise Valley prices have decreased 29.5 percent compared to 9.7 percent in the early '90s.
  • Sun City/Sun City West: Prices in the Sun Cities dropped 18.4 percent in February, up 4.0 percent compared to January. Overall, prices have dropped 33.9 percent since the peak, compared to 10.5 percent 20 years ago.
  • Tempe: Home to ASU, Tempe recorded the best year-over-year numbers in February, sliding 16.1 percent, or 2.7 percent more than January. Tempe's overall drop of 27.3 percent is the best record in the Valley for now, though it's a less attractive number when compared to the last real estate downturn, when prices fell only 1.9 percent.