By Fred Flick, Ph.D., Consultant/Housing Economist
Maryland Big Picture Market statistics from the Maryland Association of Realtors ® through June show total unit sales of 33,804 homes — down nearly 17% from a year ago. While 2006 witnessed a major sales and price appreciation correction, for the state as a whole the correction is still going on and sales are still trending down. Nevertheless, through June prices averaged about $363,032 (up almost 3%) and the median price averaged $311,300 – 1.5% higher than in the first six months of 2006. Although the average appreciation compared to a year ago has been slowing, it is still significant that prices have held up, and Montgomery County is doing better than the average.
Single-family sales are continuing to trend on the downside compared to a year ago. Year-to-date July contracts (5,448) were 16.9% below the 2006 period and settlements likewise (5,141) fell 16%. Aggravating this situation, the supply is still significantly above a year ago. Total actives of 4,389 homes were 10% above the level of July 2006, but that percentage has been declining each month. On the brighter side, solid price appreciation is still hanging on — but it is taking longer to sell homes. July prices in the county averaged $627,841, up 5.7% from a year before — this is higher than the annualized appreciation rate for May. Similarly for the median price, the July median of $510,000 was about 5.2% above a year before. However, sales units and overall dollar volume would be performing better if prices would decline more. July monthly activity showed a downward pattern for contracts and settlements. Single-family contracts totaled 704 homes, down about 23% from July 2006. Settlements (790) dropped about 13% below those of a year before. On the plus side, the 1,409 new listings were down 18% from the July 2006 additions, so this indicates that the inventory overhang is receding. Nevertheless, the July single-family inventory of 4,389 properties represents a 6.2-month supply at the July contracts pace. It will still take a while to work this off.
Condomini ums and Cooperatives
July Condominium and coop sales were also down significantly, but prices still showed appreciation compared to July 2006. Contracts for July totaled 207 units, down 22% from a year before. Through July 2007, unit settlements totaled 1,521 properties, down 17% from a year before. For the month, condo/coop settlements (172) were almost 28% below those of July 2006. While the average price of $325,612 rose 4.9% above July 2006, the middle of the price distribution saw substantially slower price growth. The $287,000 median price was only about 1.1% higher than that for July 2006, suggesting middle-income buyers were having more affordability problems. Still, the supply of active listings has continued to rise. The July inventory of 1,171 properties was almost 14% above a year before. At the July contracts pace, it represented a 5.7 months supply of properties, a near 6-month work-off period. But, new condo/coop July listings (408) were down 11% from a year ago, showing some amelioration in the inventory overhang. It will take a while, but supply is adjusting.
Recent Economic Trends
Overall output for the economy was weak in the first quarter but bounced back in the second quarter. The initial estimate for second quarter real GDP growth was 3.4%, but the final figure for first quarter growth was only 0.6%. While the second quarter figure is clearly an improvement, the average rate of economic growth so far is still only about 2%. In the fourth quarter of 2006, GDP grew at a much better 2.5% rate. Most economists expect 2007 growth to fall in the 2% to 2.25% range. Cons umer Prices and Ener gy Costs The June Consumer Price Index was up only slightly from May; but it was 2.7% higher than in June 2006. Among the various components, housing costs were up 3.4% from the year before, retail apparel prices declined 1.4%, energy rose 4.6%, and medical care rose 4%. As in May, the June ‘core’ index (excluding food and energy) moved up only 2.2% from a year before. Nonetheless, this ‘core’ rate is still above the Fed’s comfort range. On the brighter side, the 'core' Personal Consumption Expenditures Index, the Fed’s preferred inflation measure, was up only 1.9% in May, so there has been improvement on the inflation front. Based on this data, inflation seems to be trending downward, but the Fed is being very careful. For 2007, most analysts still expect that the economic slowdown will pull the overall CPI down into the 2.3% to 2.5% range and ‘core’ inflation slightly under the 2% mark.
The Fed and Mort gage Rates
In August, the Fed again left the Fed Funds target rate at 5.25%, indicating some progress on inflation, but that it is still a major risk. The Fed also indicated its concern about the financial impacts of sub-prime mortgage defaults and losses. Two days later, due to instability in financial markets and a Fed Funds market rate of about 6%, it injected $38 billion of liquidity into the banking system to help bring down the Fed Funds rate to the target level. These funds would help banks and other financial institutions to obtain loans to tide them over during the immediate mortgage securities credit crunch. Still, the Fed is not likely to lower rates anytime soon, but will periodically inject liquidity into the market to effect stability. It will take a significant drop of inflation into the 1% to 1.5% range, or a major increase in unemployment, before the Fed goes back to a more stimulative monetary policy. If economic productivity and core inflation measures continue to trend down, the Fed will likely lower rates in early 2008. We will have to see. In the mean time, mortgage rates will bounce around depending on the 'sturm und drang' that is happening in financial markets. The early-August Freddie Mac surveys showed mortgage rates down about 15-20 basis points from a month before, but they were still above those in January. In those surveys, national average 30-year contract rates were about 6.59% with 1-year adjustable rate mortgages (ARMs) averaging 5.65%. Fifteen year loans averaged 6.25%, with 5/1-yr. ARMs at 6.33%. At the beginning of 2007, the 30-year loan rate was 6.18% and one-year ARMs were 5.42%. The recent financial turmoil regarding subprime and Alt-A lending has shifted the price of risk upward. Rates have pushed above the first-week August levels. With the Fed standing pat, inflation only gradually winding down, and the sub-prime/Alt-A troubles, they will probably stay there a while. ARMs should stay in the 5.6% to 5.9% range, with 30-year fixed loans in the 6.8% to 7.2% interval over the next few weeks. With the current anxiety and volatility in financial markets, it is pretty tricky to predict a stable number for interest rates.
The Bottom Line
This year continues a correction in the sales side of the market, and is bringing slower appreciation rates than we have seen in recent years. Nonetheless, Montgomery County is holding on quite well, with single family and average condo prices beating the state and national averages. Of course units are off, and with lower prices sales would be higher. However, that’s often the way the market works. The recent turmoil in financial markets will put some upward pressure on interest rates, but will not cause the sales market to drop at a faster rate than we have seen so far. However, price appreciation will gradually diminish below recent levels by the end of the year. The best prediction is for more of the same. So, hang tough, the “correction” will likely continue into 2008 as well.