What does the trough of a real estate slump look like? Phoenix metro area property owners will have time to take a close look at this unpleasant and hazardous landscape as the real estate market slides to the bottom over the next several months -- and settles in for a slow, volatile recovery.

The W. P. Carey School produces two real estate resources which capture an overview of the plagued Phoenix market. The monthly ASU-Repeat Sales Index (ASU-RSI), produced at the Center for Real Estate Theory and Practice, tracks patterns in the single-family market. The Greater Phoenix Blue Chip Economic Forecast presents forecasts for single-family construction, and for construction, absorption and vacancy in the commercial sectors.

According to W. P. Carey finance Professor Karl Guntermann, who prepares the ASU-RSI with research associate Adam Nowak, a slight increase in resale median prices offers some hope. Construction and commercial? Elliott Pollack, co-editor of the Greater Phoenix says: Not a pretty picture.

The market for resale homes

The latest ASU-RSI, released this week, shows that prices for existing homes fell 35 percent in April compared to April 2008. That's an improvement over February and March, when prices fell by 37 percent compared to last year. The two-month projections offer more encouragement, with May expected to log a 33 percent decline and June, 31 percent. This is pretty good evidence that the worst of the price declines are in the past, said Guntermann .

The median price metro-wide for a resale home is also showing improvement, though the news is tempered by the large number of foreclosures that have not yet washed through the market. The preliminary median price in June is $119,000 -- up from $115,000 in May and $117,000 in April. It may turn out that the lowest prices were in May, Guntermann said, however the large number of foreclosed properties that have yet to sell will keep the median fluctuating around this price point for the near future.

All regions* in the Phoenix metropolitan area felt the free fall slowing slightly in April, Guntermann indicated. The sprawling new neighborhoods that pushed the southwest urban edge miles into the desert have been hard hit by the slump, but in April enjoyed the most relief: the year-over-year decline slowed from 42.7 percent in March to 37.1 percent in April. The central region (city of Phoenix) was the only area still declining more than 40 percent in the April data.

The instability of the market shows up when the March numbers for the regions are compared to April, Guntermann pointed out. Not only do they vary widely across regions, but the change in most cases is considerably different than it was from February to March, Guntermann wrote in the April report. The large number of foreclosed houses on the market makes continued instability almost a certainty in the near term.

Since the market peaked in 2006 (after price hikes of 74-81 percent), the southwest region has fallen the most -- 59 percent -- with the central and northwest regions close behind. Guntermann wrote that foreclosures fueled most of the decline. Going forward, the pattern of housing prices in those areas will be very different than before the boom, he said, adding that the resulting affordability should help those markets to recover.

Broken down by city, the data shows Sun City/Sun City West with the lowest rate of decline at 18 percent and Glendale at the highest with 40 percent. Gilbert was included in the index for the first time in April, showing a 21 percent decline.

Construction and commercial

Pollack, writing in the quarterly Greater Phoenix Blue Chip Economic Forecast, commented dryly that the real estate panel is less than sanguine about the balance of 2009 and 2010 (forecast tables). Pollack, who is a real estate consultant and economist, coordinates a consensus forecast for the Greater Phoenix from a panel of 13 consultants, developers and researchers.

The single-family [construction] market appears to have bottomed, and even 2010 will be 80 percent off the peak, Pollack said. A modest recovery will come in 2010, panelists say, with permits increasing 50 percent over this year.

Not so with commercial: Pollack says that commercial markets continue to deteriorate with the bottom likely to be in 2010.

The multifamily sector is the bright spot in the forecast -- permits in 2010 will be level with 2009, making this the only sector not expected to decline. Absorption -- the rate at which new apartments are occupied -- is expected to be negative in 2009 (some new units will stand empty), but will turn positive next year. Vacancy rates will decline from almost 13 percent to about 12 percent, the panel projects -- very high levels by historical comparison.

With absorption negative, vacancy in the office market will reach 25 percent by year's end, says the panel. Absorption may approach zero in 2010. Construction of new space totals 3.4 million square feet in 2009 but will fall to 2.2 million in 2010 and less than 1 million in 2011.

Given the high level of [office] vacancy rates, it could be years before any significant new space is required, Pollack wrote. This would be similar to the scenario that occurred in the early 1990's when Phoenix was in the throes of a real estate collapse.

The forecast calls for absorption to be negative in the retail sector for the first time on record this year. Vacancy rates are expected to be the highest (13 percent) since 1991 and new construction is expected to fall off a cliff, Pollack wrote.

Projections for the industrial sector are equally grim. Absorption is likely to be significantly negative this year and about zero next year. Vacancy rates will nearly match the peaks of the 1988-1992 real estate disaster, Pollack said.

Overall, vacancy rates are very high, absorption rates (given the economy) are very low or negative and new construction is headed towards zero, Pollack concluded. Not a pretty picture.

*Cities included in the ASU-RSI regions:

  • Northeast -- Carefree, Cave Creek, Fountain Hills, Paradise Valley, Scottsdale
  • Northwest -- El Mirage, Glendale, Peoria, Sun City, Sun City West, Surprise, Youngtown
  • Central -- Phoenix
  • Southeast -- Apache Junction, Chandler, Gilbert, Higley, Mesa, Queen Creek, Sun Lakes, Tempe
  • Southwest -- Avondale, Buckeye, Goodyear, Litchfield Park