July/August 2006

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

Through April, Maryland unit sales of 24,038 homes were below the same period in 2005 by 14.5%. However, although 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 $343,700 -- rising 11.8% above the same period a year ago. However, the unit decline has hurt as the April year-to-date total dollar volume was 4.5% below last year’s level.

While it is still early in the game, these results signal a tougher market than last year. Although prices are still holding up, the inventory level of 112,983 units statewide is 141% of last April. The high prices sellers have been receiving have worked their magic on supply, so now there are more than enough homes available. This situation will continue to exert pressure on prices.

Single-Family Homes

Overall, the April single-family market was still appreciating with prices still showing some ability to move up. However, we should expect some continued softness in the pace of sales and slowing appreciation rates as mortgage rates are likely to keep rising for the near term.

Compared to a year before, April unit sales were trending down. April year-to-date contracts (3,726) declined over 11%, and the monthly contracts (1,092) declined 23% from a year earlier. The story is similar for settlements. Year-to-date settlements (2,950) declined 11%, and April settled sales (823) slipped about 12% compared to last year. The settlements were likely contracted in late February or March, so the market has been softening since the beginning of the year.

On the supply side, April total active listings of 3,476 ratcheted up almost 164% from the level of 2005. For the month, there were 2,086 new listings, and these were up nearly 7% from the same month in 2005. At this recent contracts pace, there was a 3.18 months supply of actives – more than in February or March and raising the pace in March by 2 weeks.

Nevertheless, single-family home prices continued a slow upward slog. April single-family home prices averaged over $571,600 – rising 1.4% from a year ago but up only about one-half of a percent from the March price. The tapering-off of the month-tomonth changes, confirms a definite slowing price trend. At the middle of the price distribution, the April single-family median price came in at $470,000 moving just 1% above its 2005 value; and up only about 1.1% compared to the March median price.

Condominiums and Cooperatives

The condo/coop market continues to be the weakest segment of the Montgomery County housing market, but that is true nationally as well. April stats showed weakness in both contracts and settled sales compared to a year ago; nevertheless, prices still rose at strong double-digit rates. Eventually those price differences will narrow as they are negatively impacted by the huge inventory of active listings.

Compared to April 2005, the month’s new listings (550) rose 11%, but total actives (1,022) are an astounding 237% above a year ago. At the monthly contracts pace, there was a 3.6 months supply of actives on the market, up about a month higher than the February and March paces.

Responding to higher interest rates and the perceived excess supply, the pace of condo/coop contracts and settlements has been leveling off. March and April contracts declined compared to a year before. The March pace of 323 under-contract units slipped to 286 in April—a drop of 27% from April 2005. Furthermore, April settlements (256) plunged 20% from a year ago, but they were up from the March 2006 numbers. So, although there was a slight increase in units settled on a monthly basis, there was a significantly downward relative shift in the market.

While condo/coop price appreciation has been holding up, the large inventory is leaning on those who want to sell (especially investors) to lower prices. The April condo/coop average price hit $312,409 – slightly under a 10% leap over a year ago. And, the April median price was up 3.6% to $285,000. But, the March average price was higher at over $313,500, and the median for March was the same as the April figure. So, the higher end condos still seem to be selling, but there is a flattening in prices for the medium-priced units.

Recent Economic Trends

The Federal Reserve raised rates in May, pushing the Fed Funds target rate to 5%. Their language left open the possibility of additional increases. A recent consumer price index report suggested “core” prices (excluding food and energy costs) could be moving up. Because Bernanke still needs to show strength against inflation, it is likely he’ll move to 5.25% in June. If inflation seems tame after that, he’ll stand pat.

Clearly, adjustable loan rates will move up with the Fed increases and longer-term rates have been cheap relative to the value of the long-term lock-in. But, the Fed has to be concerned with the relatively flat yield-curve, especially in a world of government overspending and heavy consumer debt. While the curve has steepened a bit in recent weeks, the 10-year Treasury rate at about 5.1% is too low. Bernanke would like to see a higher long-term rate, as the Fed has mostly pushed up rates on short-term Treasuries and debt tied to those rates. Eventually, with continuing energy price and commodity price inflation, the 30-year bond rate should rise closer to the 5.5% to 6% range. However, it will still take a few months. Mortgage rates should still be decent for most borrowers over the next couple of months.

Consumer Prices and Energy Costs

The main Consumer Price Index in April rose from its March level and April consumer prices were about 3.5% higher than those of April 2005. Energy was running about 18% higher and food was 1.8% higher than last April. The most important “core” inflation rate, when food and energy are subtracted out, rose 2.3% which is higher than in recent months. The stock market Dow Industrials index dropped about 175 points when this report was released, anticipating further Fed rate rises. So far, analysts are still sticking with their slide-rules and believe that the overall inflation rate will stay in the 3% to 3.5% range in 2006, with “core” inflation in the low 2% range.

The Bottom Line

The 2006 market will be solid overall, even as the pace of sales is slowing. The big challenge will be to get the market to trade. Overly optimistic sellers may still be praying for bidding wars, but those prayers will be in vain. And, it will be harder to convince them that prices are not where they were a year ago. The huge inventory of both single-family and condo/ coop properties will be a problem for prices. While prices will still be good, early spring numbers suggest a smaller unit volume and likely smaller total dollar volume. As in New Orleans, the good times will continue to roll, but it won’t be like last year.