July/August 2007

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

The Maryland Big Picture

Based on the Maryland Association of REALTORS® statistics through April, figures show total unit sales of 21,060 homes – down 12% from over 24,000 units for the same period in 2006. While 2006 witnessed a major sales and price appreciation correction, sales are still trending down with decreasing price appreciation rates as well. Nevertheless, so far, prices in 2007 have averaged about $355,496 (a 3.5% rise) and the median price has averaged $306,540 – 2.5% higher than in the first four months of 2006.

Single-Family Homes

Single-family sales are continuing to trend on the down-side compared to a year ago. Year-to-date May 2007 contracts (3,974) were below the 2006 period by 16.6% and settlements (3,340) were down 15.8%. Furthermore, the supply glut continues with the listing inventory. Total actives of 4,327 homes were 15.4% above the level of May 2006, so the large inventory overhang is still “hanging on.” Nevertheless, average and median prices have not declined, but it takes longer to sell homes. May prices averaged $608,088, up 2.4%; and, the median price of $495,000 rose $10,000 or about 2.1% above the May 2006 figure. These numbers are supported by the strong income growth in the area and are a testament to the stubbornness of sellers. However, sales units and overall volume would be higher if prices would slip. May monthly activity also followed the trend. Single-family contracts totaled 930 homes, down 13.8% from May 2006. However, settlements (711) dropped 25.9% below those of a year ago. On the plus side, the 1,908 new listings declined 12.2% from a year ago; so, the additions to inventory seem to be adjusting to overall market conditions.

Condominiums and Cooperatives

Likewise it has been, and even more so, for condominium and coop sales. Contracts for May totaled 234 units, down almost 25% from a year before. And, since new May listings (472) were down only 5%from a year ago, there will be continuing price pressures. Through May 2007, units settled year-to-date totaled 1,075 properties, down 14% from a year before. For the month, condo/coop settlements (225) were almost 20% below those of May 2006. Nevertheless, the average price of $322,914 rose almost 4.1% above May 2006; and the $289,900 median price was about 2.1% higher. This market continues to hang tough on the appreciation front. Still, the supply of active listings has been rising. The May supply of 1,116 properties was 15.5% above the May 2006 level, so prices may have to give in a while, if sellers are to move their properties.

Recent Economic Trends

For all of 2006, the real gross domestic product grew by 3.3%, a tad faster than the 3.2% expansion in 2005. But, the first quarter of 2007 was a “real” disappointment. Real GDP growth came in at only 0.6%. While most economists are concluding that the housing slow down has not hurt the economy as much as originally thought, it is still taking a toll. Also, some economists see business investment spending, especially in manufacturing, coming back and consumer spending is starting to do better than expected. However, most economists still believe that 2007 growth will come in around 2.5% – slightly below the 3% to 3.5% historical average. Again, this economy can achieve a ‘soft landing,’ with growth taking off after that. There are risks if inflation continues to stay above 2% and interest rates rise – housing and consumers could take a bigger hit and growth would be lower.

Consumer Prices and Energy Costs

The overall Consumer Price Index for April pegged inflation at 2.6% compared to April 2006; and it was up 0.4% from March. While energy costs inflated only 2.9%, food increased 3.7% from April 2006. Similarly, the index for housing was up 3.4%, retail apparel prices slipped about one-half of a percent, and medical care rose 4%. Most importantly, the ‘core’ index (excluding food and energy) moved up 2.3% from a year before. While the stock markets took this as a sign of declining inflation, the Fed is still remaining vigilant. For 2007, it’s expected that the 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 May meeting, keeping the funds rate at 5.25%. While, recent figures from the Consumer Price Index and Personal Consumption price index have shown core inflation to be gradually coming down into the low 2% range, it is taking its time and has shown some backsliding. The Fed is concerned about a consumer spending melt-down, unemployment in the manufacturing sector, and now problems with high mortgage defaults and financial losses. Nevertheless, indications are that the Fed is sticking to its guns about seeing core inflation at the 2% mark, at worst. It may take some more months before we see that, and until then the Fed is likely to stand pat on mortgage rates. The most recent bad news is that interest rates are moving up, due to bond market fears of future inflation. This is directly feeding into mortgage rates. While the mid-May Freddie Mac surveys showed mortgage rates still affordable, they have jumped about 30 to 50 basis points from the beginning of the year. In early June, national average 30-year contract rates were about 6.53% with 1-year adjustable rate mortgages (ARMs) averaging 5.65%. Fifteen year loans averaged 6.22%, with 5/1-yr. ARMs at 6.94%. At the beginning of 2006, the 30-year loan rate was 6.21% and one-year ARMs were 5.16%. ARMs should see a continuation of the 5.6% to 5.7% range, with 30-year fixed loans in the 6.5% to 6.6% interval in the near future.

The Bottom Line

This year is definitely starting out slower than expected for Montgomery County. Home sales had a significant correction in 2006, but that correction is continuing into 2007. While prices are still logging minimally acceptable appreciation rates in this environment, each month their annual comparison rates have been slipping. With interest rates rising, be ready to see more slippage. Like another current event very much in our minds, this real estate year is continuing to be a “long hard slog.”