The latest median resale home price in the Valley is $256,900. That's down from $263,000 in September of last year, according to the monthly report. The record of $267,000 was set in June.

The price drop rattles one of the fundamental assumptions of Phoenix housing: Buy a home and it will probably be worth more next year. It's another reason for skittish buyers to stay on the sidelines.

"The problem gets to be what is the incentive to move into the market?" said Jay Butler, head of the real estate center.

It's also bad news for people who bought at the peak of the market who are finding their houses no longer are worth what they paid.

People who need to sell now because of a relocation or other non-negotiable reasons could lose thousands of dollars on their housing investments.

"If you bought last year and you don't need to sell, bite the bullet and wait for the appreciation," said Diane Watson of Realty Executives in the northeast Valley. "But if you need to sell, buyers don't care. You have to be competitive."

Scottsdale residents Kyle and Jaci Olsen are seeing that phenomenon firsthand. They bought two investment homes in Scottsdale last year, and one has been on the market for 10 months. They paid $415,000 for it and dropped in $40,000 to $50,000 in renovations. Now, it's now listed for $435,000 after coming to market at $499,000.

"It's a nightmare," Kyle Olsen said. "It's priced really well. We've had a lot of lookers but no one is coming to the plate."