May/June 2007

By Fred Flick, Ph.D., Consultant/Housing Economist

The Maryland Big Picture

Based on the Maryland Association of Realtors ® statistics through February 2007, figures show total unit sales in Maryland were 9,504 homes -- down 5.5% from nearly 10,058 units for the same period in 2006. The year 2006 witnessed a major correction in sales with significant adjustments in price appreciation as well. Nevertheless, Maryland prices in 2007 have averaged about $357,055 (a 4.9% rise) and the median price has averaged $306,166 – 4.7% higher than in the first two months of 2006.

Single-Family Homes

Similar to the state’s performance, Montgomery County single-family sales are continuing on the down side compared to a year ago. Year-to-date March 2007 contracts (2,352) were below the 2006 period by 11% and settlements (1,885) were down 7.8%. And, the listing inventory through March was above the same period a year ago. Total actives of 3,121 homes were 5% above the level of March 2006, so the large inventory overhang is still hanging on. This has caused price appreciation to literally flatten. March average prices ($594,899) were up barely (0.2%) and the median price ($485,000) was unchanged from March 2006. Monthly activity was also following the trend. In March, single-family contracts totaled 904 homes, down 17.4% from March 2006. And, settlements of 666 properties dropped 15.8% below those of a year ago. March was a cold month in many ways and new listings were down 9.5% from a year ago, at just 1,864 properties. However, this may have a bright side. It should help bring supply in alignment with the flagging demand.

Condo/Coops

So far, the early spring market is seeing a continuation of a downward trend in condominium and coop sales. Contracts for March totaled 270 units, down 16.4% from a year before. On the bright side, there seems to have been some necessary supply adjustments that will help to keep prices from falling too much. New March listings slipped 15% to 471 units. Through March 2007, condo-coop units settled year-to-date totaled 604 properties, down 8% from the same period in 2006. But for the month of March, condo/coop settlements (217) were 13% below those of 2006 so the market is clearly on a downward trend in sales. Nevertheless, the average price of $313,779 rose 1.1% above March 2006; and, the $287,750 median price was 1.3% higher, so the market is hanging onto a thread of appreciation. But there are still forces keeping pressure on prices. The supply of active listings, 962 properties, was 7.4% above the March 2006 level.

Recent Economic Trends

Growth in the 2006 economy pleasantly surprised virtually all economists. The third quarter real GDP growth was only 2%, but the fourth quarter came in at 2.5% in the revised figure. For all of 2006, the economy grew by 3.3%, which was faster than the 3.2% expansion in 2005. Economists are concluding that the housing slow down has not hurt the economy as much as originally thought, as businesses and consumers are still optimistic and spending. However, most economists are forecasting slower 2007 growth hovering in the range of 2% to 2.5%. Economists are just now forecasting a slow 1.3% to 1.5% rate of growth for the first three months of 2007.

Consumer Prices and Energy Costs

The Consumer Price Index for February was 2.4% higher than a year before, and it rose 0.4% from January. On an annualized basis, energy costs were down 1%, but food increased 3.1% from February 2006. Furthermore, the index for housing was up 3.3%, retail apparel prices edged up 2.1%, but medical care again rose 4.3%. Nevertheless, the ‘core’ index (excluding food and energy) moved up 2.7% from a year before, still above the Fed’s comfort range. For 2007, most analysts are assuming that an economic slowdown will pull the overall CPI down into the 2.3% to 2.5% range and ‘core’ inflation around the 2% mark.

The Fed and Mortgage Rates

The Fed stood pat for the sixth straight time in its recent March meeting, keeping the Funds rate at 5.25%. While the main fear is still inflation, recent figures from the Personal Consumption price index have shown core inflation to be gradually coming down into the low 2% range. Also, the Fed is still concerned about a consumer spending meltdown, unemployment in the manufacturing sector, and now problems with high defaults and financial losses from Alt-A and subprime mortgage lending. The second week of April surveys showed mortgage rates still affordable compared to a year ago. National average 30-year contract rates were about 6.22% with 1-year adjustable rate mortgages (ARMs) averaging 5.47%. Fifteen year loans averaged 5.93%, with 5/1-yr. ARMs at 5.9%. These rates have not changed much from the beginning of this year; and, at the beginning of 2006, the 30-year loan rate was 6.21% and one-year ARMs were 5.16%. ARM rates should continue in the range 5.4% to 5.6% with 30-year fixed loans about 6.1% to 6.3%. With the Fed standing pat, and inflation gradually winding down, these rates should hold through the spring market.

The Bottom Line

Overall, 2006 was a solid year for Montgomery County Realtors ®, but 2007 is definitely starting out slower than a year ago. Home sales and prices have had a significant correction, but prices still logged decent appreciation. So far this year is seeing a flattening of price increases, and we have seen some declines in some market areas. Interest rates will continue to fluctuate around current values, and it is possible the Fed will reduce rates around the middle of the year. The National Association of Realtors ® has recently released a national projection for a 2% decline in sales and nearly 1% slip in home prices. Fortunately, Montgomery County isn’t like the rest of the nation. While this is likely be a slower year than 2006, we’ll have to see how prices trend. A couple of interest rate declines could help keep price appreciation in positive territory, but it will be a tough market. Again, it will continue to take finesse to get deals through and the total sales numbers are likely to slip below 2006. What’s important is that the market trades; as long as you can get it to trade, there’s money to be made.