May/June 2006

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

The sales side of the market has changed substantially from a year ago and even a couple of months ago. Based on MLS stats through February, cumulative Maryland unit sales of 10,058 homes were below the same period in 2005 by 15%. However, although unit sales are not as strong as last year, there are still plenty of buyers who can afford to pay the prices. So far, Maryland prices are averaging about $341,000 -- rising 14.7% above the same period a year ago. But, the unit decline has hurt as the year-to-date total dollar volume of $3.43 billion is 2.7% below last year’s level. While it is still early in the year, these results signal that we are in a tougher market.

Montgomery County stats through February have it second in Maryland sales to Prince George’s with a yearto- date total of about 1,568 settlements (about 15.6% of total year-to-date state unit sales). And, settlements are down about 16.7% from the same two months in 2005. Nevertheless, continuing a favorable trend for sellers, average prices year-to-date were up double-digits over a year ago. Through February, prices for all units averaged just over $504,400 and were 13% above 2005.

Single-Family Homes

Compared to a year before, February unit sales were down. Year-to-date contracts (1,567) were down almost 7%, but February contracts (823) declined nearly 8% from a year before. The story is similar for settlements. Year-to-date settlements (1,186) dropped 16%, and February settled sales (608) were down 16% compared to last February. The settlements were contracted in late December of January, so future settled sales should not show changes as severe.

On the listings supply, February total actives of 2,017 vaulted over 100% from the level of February 2005. And, for the month of February, there were 1,201 new listings -- up 24% from the same month in 2005. At the contracts pace, there was a reasonable 2.45 months supply of active listings.

As has been usual with this market, the best news is in the performance of prices. February single-family home prices averaged $544,763 – up 10.3% over a year ago; however, it was down 8.7% relative to the January average price. Warmer weather in the region in December and January likely helped with the number of buyers and bids. The February median price came in at $452,450 up almost 9.2% above its 2005 value. Overall, the February single-family market saw some slippage in sales relative to a year ago, but prices are still maintaining low double-digit appreciation rates compared to early 2005. With two more hikes in interest rates expected, we should still expect some continued softness in the pace of single-family sales and slower rates of annualized price appreciation are likely.

Condominiums and Cooperatives

The February condo/coop market showed weakness in both contracts and settled sales compared to a year ago. While condominium and cooperative contracts and settlements were down by both monthly and yearto- date measurements, prices still rose at near doubledigit rates. And, similar to the single-family market, there was plenty of inventory. Compared to a year ago, February new listings (420) ratcheted up 38%, and total actives (706) soared an unbelievable 185% from a year ago. At the monthly contracts pace, there was a 2.5 months supply of actives on the market.

Along with the slowing of the market, the relative pace of condo/coop contracts has been leveling off. For both the month and year-to-date February, contracts were down by 5.3%. Settlements were down at a higher rate. Through February, they dropped 18% with monthly settlements dropping 16% compared to 2005. The contracts drop could have been influenced by a colder February (relative to January); however, contracts for settlements were likely ratified in late December or January, relatively mild months weatherwise. Nevertheless, these results continue to suggest that we are in a slower condo/coop market for the early spring.

The average February condo/coop price hit $299,464 – an 8% leap over a year ago and median prices ratcheted up almost 10% to $280,000. However, prices in February were down from the January levels. The average dropped about 12% and the median was down nearly 7%, suggesting a slowing rate of appreciation. Still, these annual appreciation rates are good, especially for sellers who have owned for a while, and in an environment of rising interest rates.

Recent Economic Trends

The Federal Reserve raised rates in January, pushing the Fed Funds target rate to 4.5% and leaving open the possibility of additional increases. By the time you read this, the rate will be up to 4.75%. Now, economists are split between whether chairman Bernanke will push it to 5% by May, but. I’m expecting the rate to move to 5% with a pause after that to see how the economic data play out. Bernanke still needs to establish his credibility as an inflation fighter and the economy is still doing well. He won’t push too hard after 5%, as he does not want to put us on the edge of a recession. That would be bad form, considering the legacy of Greeenspan.

While interest rates will continue to gradually move upward, strong Maryland income growth will maintain solid annual rates of housing price appreciation, but the rates will tend to level off with time. Rising interest rates will likely cause a slight decline in unit sales this year, but strong income growth will still bring near double-digit levels of annualized appreciation rates.

Consumer Prices and Energy Costs

Although 2006 productivity growth (real GDP) will be in the acceptable 3% to 3.5% range, the latest inflation data is only partially comforting. The Consumer Price Index indicated that February consumer prices were about 3.6% higher than those of February 2005. When food and energy were subtracted out, the “core” increase was only 2.1%. Nevertheless, most analysts still believe that the overall inflation rate will stay in the 3% to 4% range in 2006, with “core” inflation in the low 2% to 2.5% range.

On the energy cost front, the warmer winter in the Northeast and Midwest allowed natural gas and oil prices to drop back a bit from their highs early this year; but, they still remain volatile depending on inventories, weather, and international politics. Expect a continuing see-saw on gas prices. Alternative sources of fuel will eventually challenge gasoline and natural gas; but for that to happen, oil and natural gas prices need to rise higher and stay up there. In the short-run, careful trip planning and efficient use is the only way you can try to keep gas costs down.

The Bottom Line

The year 2006 will be a transition year as the pace of Maryland and Montgomery County real estate slows. An important challenge in the business this year will be to educate sellers and accurately price their listings, especially as price appreciation eases. It will also be important to help your customers make good mortgage choices and avoid high-risk low-equity building instruments. Down the line, debt-ridden homeowners with no equity are much less attractive as repeat buyers.