December 15, 2010

While Phoenix-area Home Prices Keep Dropping, Commercial Real Estate Has Leveled Off

TEMPE, Ariz.— New reports show the Phoenix-area housing market is back on a downward slide, while the commercial real estate market finally seems to have leveled off. The new residential and commercial reports both come from the W. P. Carey School of Business, and the commercial study predicts some positive movement in 2011.

“If the historical pattern is followed, which appears to be the case, 2011 should see a significant improvement in commercial prices, basically a recovery from the distressed levels of 2009 and 2010,” says Professor Karl Guntermann, the Fred E. Taylor Professor of Real Estate, who authored the reports with research associate Adam Nowak. “However, the improvement in the commercial market for the next few years is likely to occur fairly gradually, given the expected recovery in the Arizona economy and unusually high vacancy rates in all sectors of the commercial market.”

Guntermann produces both the monthly Arizona State University-Repeat Sales Index (ASU-RSI) on housing and the quarterly index focused on the commercial real estate sector. On the residential side, the ASU-RSI measures annual changes in average Phoenix-area home prices.

The latest housing index reveals an unfortunate fourth month in a row of year-over-year declines. The preliminary data for November 2010 shows a 7-percent drop in average prices from November 2009. Previous reports documented a 6-percent dip from October to October, a 4-percent decline from September to September, and a 2-percent drop from August to August. Before that, the market hadn’t been in negative territory since March.

“Given the pattern that is emerging, it is likely declines will continue for at least the next several months,” says Guntermann. “The recent improvement in Phoenix employment is an important step in getting the housing market back to normal, but the process will continue through 2011 and beyond. Markets don’t move smoothly in one direction, so perhaps it should not be surprising that another period of price declines has begun.”

Guntermann does point out that in 2010, the housing market finally reached some stability after almost three years of declines, and he believes the worst is over.

“With the economy gradually recovering and the foreclosure problem past its peak, the odds are good that the housing market will end 2011 a lot better than it will be beginning it,” adds Guntermann.

The overall median price for home sales in the November index was $122,300. Since 2009, the median price has remained between $122,000 and $135,000. The median price specifically for foreclosed homes in November was estimated at $106,000, a new low for the year. This may signify that foreclosed homes are no longer the biggest bargains on the market.

Townhouse/condo prices continue to dramatically drop at a rate of around 20 percent per year. The median price for Phoenix-area townhouses/condos in November was just $63,000.

On the commercial side, Guntermann shows that historically, the commercial real estate index follows the trends of the residential side. For example, the residential index peaked in mid-2006, almost two years before commercial real estate prices peaked.

“The commercial market is tied more directly to economic fundamentals, which remained strong well into 2007, explaining why commercial prices lagged the residential market,” says Guntermann. “After bottoming out at the end of 2009, the commercial index has moved in a narrow range, indicating that commercial prices have stabilized, but at approximately where they were prior to the great expansion.”

Commercial prices peaked at an annual rate of 28 percent in the third quarter of 2006. They then experienced an unprecedented decline that reached an annual rate of 40 percent by the end of 2009. However, things have leveled off, with essentially no change from the third quarter of 2009 to the third quarter of 2010. Interestingly, the residential market plunge lasted more than three years, but the commercial drops lasted less than a year and a half.

Both the commercial and residential indices are based on repeat sales, the most reliable way to estimate price changes in the real estate market. Repeat sales compare the prices of a single property against itself at different points in time, instead of comparing different homes and commercial properties with different quality factors.

The new ASU-RSI reports can be found at and Further analysis is also available from Knowledge@W. P. Carey, the business school’s online resource and biweekly newsletter, at

The W. P. Carey School of Business at Arizona State University is one of the top-ranked and largest business schools in the United States. The school is internationally regarded for its research productivity and its distinguished faculty members, including a Nobel Prize winner. Students come from 99 countries and include 60 National Merit Scholars. For more information please visit and