July/August 2005

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

In April, Maryland unit sales volume was up nearly 4 percent (from April 2004) accompanied by an average price of $320,894 statewide. Montgomery County lead the state with nearly 1,300 settled sales of single-family and condo/coop properties. However, these county-wide settlements are down about 5 percent from the levels of April 2004. Nevertheless, the trend of average and median prices in the county was strongly upward. The average single-family home price rose to $548,059 — jumping 21 percent from April 2004. For condo/coops the average hit $287,485, rising a more “moderate” 15 percent. Similarly, median prices for single-families and condo/coops ratcheted-up the same 21 percent rate — to $450,250 and $259,500 respectively. Total dollar volumes for April exceeded $523.9 and $95.4 million, for the two property types.

Condo/Coops

April condo and coop unit sales were relatively better off than the single-family market, due to their affordability. Condo/coops had about the same number in inventory as a year ago with new April listings up 13 percent compared to those in April 2004. Furthermore, year-todate contracts were up 3.5 percent and new April contracts jumped almost 11 percent. So this market is looking solid.

Thus far, final sales have been doing very well. Throughout the first four months of the year, settlements were up 4.5 percent compared to the same period last year (for the month they were down almost 5 percent compared to a year ago). Inventory seems to be rising at a solid rate – so there will be plenty of product. And, contracts are up stronger than for singlefamilies, with year-to-date settlements are showing solid positive growth. The affordability of condo/coops is a good explanation for the relatively stronger performance. But demand for investment properties is also another factor that has helped this market.

Single-Family Homes

For single-family homes, while prices have been up, there are some signs that the unit sales side of the market may be down a bit in 2005. Total Active listings from March to April were up 35 percent, but they are down 11 percent from last April. This suggests there could be some problems matching buyers to properties if buyers continue to be as plentiful. Listings generally rise in the second quarter, but new listings only rose 3 percent in April compared to a year ago. On the other hand, a tight inventory has meant big price jumps, as long as buyers can afford to buy.

April contracts performance was mixed. Year-to-date contracts were up negligibly compared to April 2004 (under 1 percent), but the month’s 2005 business exceeded 2004 by over 8 percent. Settlements were somewhat disappointing as well. YTD settlements were down slightly less than 1 percent from a year ago; and new settlements in April declined 5 percent from a year ago. To sum up the single-family stats: April inventory was down significantly from a year ago (likely due to the colder-than-average March weather) but increasing; year-to-date contracts were roughly unchanged; however, final settlements were down a bit. So far it looks like a tight market from the supply side, but we’ll have to see how demand responds.

Local and National Economic Trends

The Washington, DC metro area has been one of the strongest in the country in terms of job and income growth. A significant share of the growing Federal budget expenditures for defense, health, and homeland security are doled-out right here and go directly into jobs and local income. Accordingly, the area’s housing market has benefited mightily. But, the rate of these expenditures is expected to decline after this year, so it is likely we will see some affordability and qualifying problems developing in future years.

Recent data shows some rises in consumer inflation, especially in this area, and the Federal Reserve seems to be sticking with its policy of forcing up the short-term rate structure, which raises prime and adjustable mortgage loan rates. It has moved short-rates up but long-term bond rates have actually declined due to low inflation and international demand for U.S. securities. Most recently, the 10-year Treasury bond dropped below 4 percent -- a historical rarity. Freddie Mac national surveys of mortgage financing for the first week of June showed long-term mortgage rates averaging 5.62 percent and 1-year adjustables at 4.26 percent. However, the Fed will continue to push on short-rates and, by late summer, 30-year fixed-rate mortgage loans should move closer to the 6 percent level and ARM rates should move into the 4.5 percent range.

Bubble Babble

Recently, the media has been saturated with stories about real estate ‘bubbles’. Greenspan and some Fed governors have agreed to the existence of local “bubbles”. But, their position is that they do not want to use monetary policy to pop ‘asset bubbles.’ Financial flexibility and control of inflation are their main goals. However, it appears federal regulators will start trying to lessen the use of interest-only and other higher-risk financing vehicles. This will definitely start cutting out some buyers. The Fed will continue to push up short-term interest rates into mid-summer, but they may take a break after that. Nevertheless, you can expect that they will be looking for ways to reign in some of the financing that has made these real estate markets boom. By the way, the boom is mostly on the coasts. Areas like Chicago have only seen appreciation rates of at most 10 percent, and much of Ohio has lost manufacturing jobs and never quite recovered from the 2001 recession. If they get too aggressive with interest rates, they run the risk of hurting a lot of manufacturing states. Layoffs and the strong possibility of at least one line going under are causing them to proceed cautiously. Also, the financial risk that hedge funds and some large corporations have been taking on is tempering their zeal. This has worked well for the real estate business, especially since it has been a major driver of economic and job growth.

The Bottom Line

On the whole, 2005 should continue to be good for Montgomery County’s real estate business, but tapering off a bit as the year progresses. Price appreciation rates should slow, but it is not likely that there will be any sudden drops in sales or prices. Any ‘bubbles’ won’t burst; but, there way be some leakages. We should see some non-seasonal slowing in the overall market by the fall. Just keep feeling the love.

Fred Flick has spent more than 20 years as an analyst, manager, and association spokesperson. He has published numerous articles and made presentations on the economy and real estate markets. Prior to starting his own company, Flick was Vice President for Economic Research at the National Association of REALTORS®.