True to its name, Phoenix has risen from the ashes of its foreclosure-ridded real estate market to lead the nation in year-over-year price increases, up 32.63 percent year over year in Realtor.com’s May data.

A new analysis of appraisal data from the Phoenix market, which has puzzled experts and delighted local homeowners, suggests that its prices overshot the downside and fell further than warranted due to the appraisal methods used to set values: replacement cost and income capitalization.

Home prices in Phoenix reviewed by economists at Home Value Forecast suggest they are selling at significantly below their replacement costs and the rental yields generated on these homes are far above historical levels. Based on employment growth and affordability they argue the Phoenix market is detached from economic fundamentals.

“Phoenix provides a good case study of a market which has been in transition over the past year,” said Tom O’Grady, CEO of Pro Teck Valuation Services. “Market drivers here have all turned positive for home prices, with months of remaining inventory (MRI) dropping to the lowest in the country. The big drivers are that these homes are selling at significantly below their replacement costs and rents, and the rental yields these homes can generate are far above historical levels.”

Looking at historical employment numbers and the median single family prices in Phoenix since 1985, the authors note a correlation up to 2004, at which time home prices went into bubble mode and became completely detached from the employment picture. After the peak of the market in 2007, the median price began to revert back to a more sustainable level such as what would be suggested by the employment numbers. However, as is typically the case with bursting bubbles, Phoenix home prices went not only to the economically-based level, but significantly below it. Since home price cycles are measured in years not months, the authors note that it isn’t surprising that the Phoenix market (and other bubble markets) have spent the last several years in a bottoming out process before they begin to revert back to their fundamentally driven values.

“The Phoenix market recovery shows many positive leading indicators including the number of active listings in Maricopa County down 39.4 percent from a year ago, months of remaining housing inventory down to 2.5 months and foreclosure sales down 50.4 percent,” added O’Grady. “In many areas of the Phoenix market, we are seeing nearly every ZIP code classified as “strong” or “good” according to our most recent Market Condition scoring system.”

This month’s Home Value Forecast update also includes a listing of the 10 best and 10 worst performing metros as ranked by our market condition ranking model. The rankings are run for the single family home markets in the top 200 CBSAs on a monthly basis to highlight the best and worst metros with regard to a number of leading real estate market indicators, including: sales and listing activity and prices, MRI, days on market, sold-to-list price ratio and foreclosure and REO activity.

“The top ranked metros in the current month represent an interesting mix of U.S. real estate markets. Not surprisingly, our case study Phoenix market is one of the strongest, as are other southwest U.S. markets such as Dallas, Houston and Oklahoma City,” said Michael Sklarz, Principal of Collateral Analytics and contributing author to Home Value Forecast. “One thing that all these markets have in common is that they all have experienced significant declines in active listing counts over the past year, leading to tighter months of remaining inventory.”

• June’s top CBSAs include:

Phoenix-Mesa-Glendale, AZ

Dallas-Plano-Irving, TX

Houston-SugarLand-Baytown, TX

Oklahoma City, OK

Fort Lauderdale-Pompano Beach-Deerfield, FL

Warren-Troy-Farmington Hills, MI

Birmingham-Hoover, AL

Salt Lake City, UT

Los Angeles-Long Beach-Glendale, CA

Santa Ana-Anaheim-Irvine, CA

“A high percentage of the bottom-ranked metros continue to be located in the Northeast,” added Sklarz. “All have double digit Months of Remaining Inventory. Prices in these metros have held up much better since the market peak in 2005-06 compared to the current top ranked markets. This helps explain the relative rankings in that the bottom ranked metros are not offering the same bargains as the top ranked ones with regard to compelling prices and high rental yields.”

• The bottom CBSAs for June were:

Saginaw-Saginaw Township North, MI

Tyler, TX

Salem, OR

Harrisonburg-Carlisle, PA

Nassau-Suffolk, NY

New York-White Plains-Wayne, NY-NJ

Eugene-Springfield, OR

New Haven-Milford, CT

Newark-Union, NJ-PA

Poughkeepsie-Newburgh-Middletown, NY

“The top ranked metros in the current month represent an interesting mix of U.S. real estate markets. Not surprisingly, in our case study Phoenix market is one of the strongest, as are other southwest U.S. markets such as Dallas, Houston and Oklahoma City,” said Michael Sklarz, Principal of Collateral Analytics and contributing author to Home Value Forecast. “One thing that all these markets have in common is that they all have experienced significant declines in active listing counts over the past year, leading to tighter months of remaining inventory.”