January/February 2007

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

The Maryland Big Picture

This year has experienced a major correction in sales with significant downward adjustments in price appreciation rates as well. For the first eleven months, statewide home sales were down by 21%, but average prices were up about 6% from a year ago. Through November, Maryland sales units totaled 73,510 compared to a whopping 93,129 for almost all of 2005. Yet, despite this correction, year-to-date prices averaged $357,629. In fact, the median price of $308,755 was 7% higher than for the same period in 2005.

Single-Family Homes

In Montgomery County, November single-family contracts and settlements continued to be down nearly 20%, but prices were still up from a year ago. While annual appreciation rates dropped to under double-digits, they are still positive and no one is predicting big declines. Compared to a year before, November sales continued to trend down. Year-to-date contracts (9,711) declined 22%, with monthly contracts (704) down 19% from a year earlier. Settlements performed about the same. Year-to-date settlements (9,500) dropped 22%, and November settled sales (678) fell just under 20% compared to a year before. On the supply side, November listings were down a whopping 21% from last November, lessening the inventory over-hang in the market. There were only 908 new listings — down from the 1,152 pace of a year before. Nonetheless, there are still plenty of homes available — November total actives of 3,225 were up 48% from November 2005. At the recent contracts pace, there was a 4.6 months supply of actives, a bit higher ratio than earlier in the year. Although sales are much slower than a year ago, single-family prices continue to move up. November single-family prices averaged $594,993 — rising about 5.6% from a year ago. Price appreciation at the middle of the distribution was somewhat less — the November median of $485,950 was up 4.5% from a year ago. While there have been fewer buyers out there this year, prices are still managing modest appreciation. Again, the good news is that there are buyers who can afford most of the market, there just aren’t as many as last year.

Condominiums and Cooperatives

The condo/coop market is continuing to be much softer than the single-family market. November numbers show significant double-digit declines in both contracts and settled sales compared to a year ago. Still, even in this market segment, prices have been rising — albeit at slower rates. While the rate of increase of inventory is slower than earlier this year, there is still a large excess inventory of active listings. For November compared to a year ago, new listings (269) were down 29%; but, total actives (964) were still up 50% — a lower rate than in previous months. The November pace of new listings declined relative to earlier months; nevertheless, at the current monthly contracts pace, there was still a 4.7 months supply of actives. Condo/coop contracts and settlements are continuing to decline at doubledigit paces. Contracts in 2006 were down about 18% year-to-date, with the November pace dropping by nearly 12% from last year. November yearto- date settlements (2,762) were down 19% but monthly settlements (168) plunged almost 30% compared to November 2005. Some of the decline is seasonal, but it shows how much the market has adjusted relative to a year ago. Nevertheless, condo/coop price appreciation is still hanging on. The average condo/coop price in November was $311,960 — up about 1.8% from a year before. But, the results for the middle of the market were better — the November median of $285,000 rose 3.6% from a year ago. However, even with the historically high inventories, there have not been any sharp declines in annualized price appreciation, just a leveling-off in the rate.

Recent Economic Trends

As expected, national economic growth in 2006 has gradually tapered-off. The third quarter real GDP growth, a preliminary estimate, was only 2.2%. The second quarter rate was finalized at 2.6%, following a strong 5.6% in the first quarter. Most analysts have concluded that the slower growth is due to the slowing of the housing market and some softening in retail and manufacturing. Most economists are ratcheting down their forecasts for 2007 growth to a range of 2% to 2.5%. Maryland’s economy is still performing decently; however, growth in personal income slowed in the second quarter, compared to the nation as a whole. For this period, Maryland total personal income grew at a 6.7% compounded annual rate, compared to 6.9% for the country as a whole. Maryland personal income should grow at a solid, but slightly slower rate in 2007. However, the unemployment rate is low with the state continuing to beat the nation’s performance. The Maryland unemployment rate for October (seasonally adjusted) was 4%, compared to 4.4% for the U.S. Maryland unemployment rates should continue in that range into 2007.

Consumer Prices and Energy Costs

The Consumer Price Index for November was 2% higher than a year ago and down a bit from the previous month. The main reason was a decline in energy costs of 4%, and food increased only 2.3% from a year before. When food and energy were subtracted out of the index, the ‘core’ inflation rate was up 2.6% from a year before. This figure is still higher than the 1% to 2% range the Fed can tolerate; accordingly, don’t expect any drops in short-term mortgage rates anytime soon. Maryland still continues to show signs of inflation, but the rates are slowing. The September consumer price index for the Washington-Baltimore area rose by almost 2.7% over the same period in the prior year. This reading suggested a moderating rate, as the index was up 4.6% in July. And, since Northeast regional prices rose only 1.7% in October, it is likely that the state’s inflation rate is slowing and should continue to do so in 2007.

The Fed and Mortgage Rates

The Fed stood pat in its recent December meeting, keeping the Funds rate at 5.25%. The main fear is the weak housing market. While there has been some good news on the consumer front, the direction of that sector has yet to be determined. The mid- December Freddie Mac surveys show mortgage rates still affordable and lower than they were in November. National average 30-year contract rates are about 6.12% with 1-year adjustable rate mortgages (ARMs) averaging 5.45%. Fifteen year loans averaged 5.86%, with 5/1-yr. ARMs at 5.92%. With the Fed standing pat, and inflation only gradually winding down, rates in a vicinity of these are likely into early 2007.

The Bottom Line

Unit sales have undergone a major correction this year, with gradually slowing price appreciation rates. However, interest rates are most likely to hold relatively firm for the near future, and fears of more Fed interest rate hikes have lessened. But, don’t expect any declines in short term rates in the near future. This year we can expect sales units that will probably continue at about the same pace, at least until the Fed starts reducing rates. Prices should still show positive appreciation, as incomes in the state and county are likely to grow at least at a 5% to 6% rate. So, doing your business in 2007 will continue to require patience and finesse, as the euphoric markets of 2004 and 2005 fade further into the past.