ASU-RSI: Slower rate of decline equals improvement

August 19, 2009

Although prices in metro Phoenix dropped 33 percent in May compared to May 2008, the rate of decline once again slowed,  adding another month to an improving trend in the market, according to the ASU-Repeat Sales Index (ASU-RSI). The latest data also shows that unlike the last downturn, lower-priced homes are the hardest hit sector.

The improvement in the May year-over-year data confirms that the trend of declining prices is easing. The deceleration started in April, when prices fell by 35 percent after hovering at a 37 percent rate of decline in February and March. Based on preliminary data, June and July are projected to show year-over-year declines of 31 and 29 percent.

"It is now clear that the worst is past in terms of the rate of decline, and that prices were falling most rapidly back in February and March," writes W. P. Carey finance Professor Karl Guntermann, who compiles the monthly ASU-RSI with research associate Adam Nowak.

The current slump is often compared to the real estate decline of 1989-92 when prices declined for 17 straight months. The present decline has demonstrated stubborn staying power, logging 27 months of year-over-year percent price drops.

The ASU-RSI is now confirming another point of difference between the two cycles. In the earlier slump, the high end of the market experienced the most precipitous drops, but this time the low end is the hardest hit.

"These statistics confirm and quantify market perceptions that prices are falling more rapidly for the less expensive houses that dominate the current market, many of which are foreclosures," Guntermann said.

The surprise, he added, is the rate of decline. Homes priced below the median price dropped 48 percent in value in May 2009 compared to May 2008, and 62 percent since the peak. Higher-priced homes dropped 26 percent in May and 39 percent since the peak.

During the last major decline, from 1989 to 1992, the upper portion of the market sagged 13 percent, while the lower portion dropped 4 percent.

Overall, the preliminary median price was $120,000 in June, compared to $119,000 in May and $117,500 in April. Guntermann tentatively concluded that April may have been the bottom in terms of housing prices.

Price declines slowed in nearly all of the cities included in the ASU-RSI in the year-over-year numbers for May, although Tempe increased its rate of decline for the second month, to 24.2 percent. Prices dropped 30 percent in Peoria and 17 percent in Sun City/Sun City West comparing May 2009 to May 2008. However, those were the only two cities to show increases in prices (one-half percent) since the April numbers.

The ASU-RSI is different from many real estate indices because it compares sales prices for individual houses. Repeat sales data is the best way to track market trends, Guntermann explains, because it eliminates the need to control for the many variables (such as the characteristics of the house, location, demographics, etc.) in a diverse housing market. The ASU-RSI is similar to the Case-Shiller Index, although the data is cleaned slightly differently.