By Fred Flick, Ph.D., Consultant/Housing Economist
The Maryland Big Picture
For the state of Maryland, the market adjustments continue. August year-to-date sales came in at 55,373 homes, but they were 68,881 a year ago. This is a decline of about 20%. Nevertheless, prices are still holding up in many areas, with annualized price appreciation rates still quite strong. For the recent eight months, Maryland prices averaged over $358,200 — rising 7.4% above the same period a year ago. But, this rate of increase is below the 9.5% rate for the first 6-months of the year, so appreciation rates have been gradually tapering-off. Again, the unit sales decline is what is hurting brokers and agents the most. Cumulative dollar volume through August was over $19.8 billion; but, for same period a year ago it was over $22.9 billion — a drop of 13.6%. The level of inventory for the state is still setting records — almost double the level of a year ago, at over 40,300 listings.
Single Family Homes
In Montgomery County, August single-family contracts and settlements continued to be double-digit down, but prices were still up from a year ago and from June. It is expected that annual appreciation rates will continue to slow in the next few months; however, no one yet is predicting big declines. Compared to a year before, August sales continued to trend down. As in June, yearto- date contracts (7,438) declined about 22%, with monthly contracts (898) also down 22% from a year earlier. Settlements performed in the same ranges. Year-to-date settlements (7,132) dropped 21%, and August settled sales (944) fell 25% compared to a year before. On the supply side, August listings were down an insignificant 1% from last August, but there are still plenty of homes in the inventory. August total active listings of 3,815 were up 119% — more than double the 1,737 level of August 2005. For the month, there were 1,556 new listings – down from the 1,900 pace of June. At the August contract pace, there was a 4.25 months supply of actives, a bit higher ratio than earlier in the year. Sales have been stalling but single-family prices continue to move up. August singlefamily home prices averaged over $601,400 – rising 6.7% from a year ago, and higher than the $595,700 range in June. In fact, this annualized rate of appreciation is higher than the annualized rate in June. Price performance at the middle of the distribution is somewhat less. The August median of $490,000 was up almost 5.4% from a year ago, and still exceeded the June 2006 median of about $486,200. Even buyers of the “typical” house were still able to keep prices rising. Obviously, the continued appreciation of homes indicates there are plenty of buyers who can pay what sellers want. However, the problem is there are fewer buyers out there. If prices were lower, there would be higher sales and more commissions. The buyers out there have pockets that are deep enough; there just aren’t as many as last year.
Condominiums and Cooperatives
The Montgomery County condo/coop market is still pretty soft. August numbers continued to show declines in both contracts and settled sales compared to a year ago. However, just like the single-family market, prices have been rising, but at slower rates. There is a huge inventory of active listings, and it is relatively and absolutely higher than the single-family inventory of a year ago. Compared to August 2005, new listings (459) were up 6.3%; and, total actives (1,030) were up 152% – more than double the number a year ago. At the monthly contracts pace, there was a 4 months supply of actives on the market – up from the 3.5 months supply in June. But, the August pace of new listings was slower than the near 8% pace of June, so inventory increases were leveling-off as summer was waining. Condo/coop contracts and settlements have been declining at double-digit paces. Contracts were down about 17% year-to-date, with the August pace dropping almost 20%. Moreover, August year-to-date settlements (2,116) slipped 17% and August monthly settlements (251) dropped 25%. Nevertheless, condo/coop price appreciation is still hanging in there. The average condo/coop price in August was $313,644 – still up 2.3% from a year before. (Note: the June condo/coop average price was $310,764, up only 1.4% over a year ago). Results for median prices were even better. The August price of $285,000 rose 3.6% above a year ago – June’s median price bumped 3.2%, so the middle of the market is doing better than the high-end. Again, the rumors of the demise of condo/coop prices have been greatly exaggerated. Even with the historically high inventories, there have not been any sharp declines in prices, just a leveling-off of appreciation rates.
Recent Economic Trends
Real GDP growth for the second quarter slowed to 2.6% (final estimate), down from a 5.6% rate in the first quarter; and, the Fed does not want it to decline much more. Growth in the third quarter will probably be even slower, possibly around 2% to 2.5%. The Fed Funds rate moved to 5.25% in June and, two Fed meetings later, is still there. Many of us were predicting at least one more increase by this time, but the Fed is holding off. Much of their concern is related to the housing market and they do not want too steep a decline. The real weakness is in new home construction, which most directly affects productivity, employment, and incomes. The Fed “go-slow” policy is definitely helping real estate markets, nationwide.
Consumer Prices and Energy Costs
On the local price front, Maryland continues to show signs of creeping inflation. The July 2006 consumer price index for the Washington-Baltimore metropolitan area rose by nearly 4.6% over July 2005. The May figure was up only 4.2%. For all of 2005, metro area prices increased only 4%. These figures make sense given the level of federal spending in the area, but they measure creeping inflation in our area. Fed economists have to be concerned about it. Based on the most recent national stats, the August Consumer Price Index (CPI-U, not seasonally adjusted) rose 3.8% from August 2005. Energy costs jumped 15%, but the increase was below that of prior months. Food rose 2.4% from a year ago, and medical care edged up 4.3%. However, the “core” inflation rate (food and energy excluded) rose 2.8%. It is still rising at higher rates than in recent months, and has stayed significantly above 2% for quite a while. This suggests the Fed could do a turn-around in the next few months and boost rates higher. We’ll have to see.
The Bottom Line
So far, 2006 has been holding firm on home value appreciation, but it has definitely hurt sales. Sales units and commissions will definitely be lower this year. Interest rates could rise in the near future, if inflation rises further than its current levels. However, some analysts are predicting that a slowing overall economy will cause the Fed to hold off on any increases this year, and possibly start to lower rates in mid-2007. Analysts are about evenly split between raising and lowering in the next few months, as the data continue to be mixed. However, even a lowering of interest rates may not necessarily pump-up the housing market to the levels of 2003-2005. Those sales levels were so historically high that there may not be that many more people who would buy now, even if rates dropped below 6% on 30-year money. Also, with a slowing economy and huge Federal budget deficits, some of that local simulative spending will likely be cut back for a few years. The market is more likely to “hunker-down” and stay tough for the foreseeable future; that’s probably a good strategy for you, too.