I never advocate sugar-coating bad news.  The fact is that the real estate market in the Greater Phoenix area has fallen dramatically from highs two years ago.  I’ve written about that plenty (see my most recent Market Update blog post, for example).

But I also think that fear-mongering is equally destructive.  A recent ABC News piece was titled “Valley homes face record double-digit price drop.”  It certainly sounds scary.

According to the piece: “The Arizona State University-Repeat Sales Index reports that average prices dropped 13-percent from March 2007 to March 2008.

Karl Guntermann, the Fred E. Taylor Professor of Real Estate at the W. P. Carey School of Business, compared the current situation to the last major housing downturn of the 1990s and found the current price drop to be even more severe.

The worst drop in the 1990s was in February 1990, which recorded a decline of five-percent from February 1989.”

But let’s put that “record” price drop in context.  To do that, I went to the source: ASU’s Repeat Sales Index, which has tracked sales since 1989.  I used their data to create a chart that paints a very good picture of what has happened in the Phoenix real estate market in the last few years.  Here it is:

So, yes, the recent market downturn does represent a “record” drop when compared to the early 1990s.  But look at how rapidly and steeply prices went up prior to the downturn.  And look at where the market stands – prices are still a lot higher than before the boom.

The fact is that the Phoenix housing market was highly overinflated.  A glut of investors hungry for low-priced homes, most on the outskirts of the Phoenix metro area, led builders into a building frenzy.  Eager to jump on the bandwagon, and aided by low interest rates and “look-the-other-way” lending practices, more homeowners than ever bought into the market. 

The result: a market where demand and supply were artificially inflated.  The problem is that demand deflates very quickly – like popping a balloon.  Investors walk away, prospective homebuyers stick to renting.  Supply, on the other hand, can’t simply fade away.  So now we’re dealing with that oversupply of homes.

Once current demand – which is there; people are still buying homes in the Phoenix area – eats up that oversupply of homes, the market will be back on track.

And signs suggest that is beginning to happen.  In many markets, the number of homes resold in May, 2008 increased compared to May, 2007.  The chart below demonstrates:

So let’s not sugarcoat the situation and pretend that we aren’t in a market correction.  But let’s not perpetuate dishonest doom-and-gloom scenarios, either.