September/October 2006

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

The Maryland Big Picture

Looking at Maryland as a whole, June year-to-date sales totaled 40,491 homes, but they have slipped 17% from the first half of 2005. This is a market “correction” caused by fewer “deep-pocket” buyers in the market place and sellers who are hanging onto the prices of the recent past. Due to the “stickiness” in prices, annualized price appreciation rates still have been good. For the first six months, Maryland prices averaged over $354,000 -- rising 9.5% above the same period a year ago. But, this rate of increase is below the 11.8% rate for the first 4-months of the year. However, the unit decline is hurting brokers and agents. Cumulative dollar volume through June was a bit over $14.3 billion and for the same period a year ago it was almost $15.8 billion -- a drop of over 9%. Unfortunately, June contracts were down by almost 6% compared to June 2005. A big factor affecting prices is the level of inventory. The June inventory of 187,893 units statewide was 136% of the June 2005 level. Accordingly, it will take a while to whittle down this over-hang, and that will eventually cause price appreciation to adjust to lower levels.

Single Family Homes

For Montgomery County, June single-family sales were significantly down, but prices were still showing ability to move up. This softness in the pace of sales will continue and appreciation rates will also slow in the near term. Compared to a year before, June sales continue to trend down. Year-to-date contracts (5,669) declined about 22%, and the monthly contracts (920) dropped over 39% from a year earlier. Settlements performed similarly. Year-to-date settlements (5,064) dropped 17.5%, and June settled sales (1,011) fell 29% compared to last year. While monthly listings are down compared to a year ago, there still is a huge inventory bulge. On the supply side, June total active listings of 3,834 are still up over 162% from the level of June 2005. For the month, there were 1,936 new listings, but these were down only 3.4% from the same month in 2005. At this recent contracts pace, there was a 4.2 months supply of actives. Nevertheless, single-family home prices continued to move up. June single-family home prices averaged about $595,700 – rising 5.7% from a year ago. The month-tomonth rates of price increase are lessening with the slowing market. At the middle of the price distribution, the June single-family median price came in at $486,173 moving just 4.6% above its 2005 value.

Condominiums And Cooperatives

In Montgomery County, the condo/coop market continues to be the weakest segment of the housing market. June stats continue to show weakness in both contracts and settled sales compared to a year ago. Nevertheless, prices still rose, but at much slower rates. Again, the huge inventory of active listings is keeping the pressure on. Compared to June 2005, the month’s new listings (496) rose 7.8%, but total actives (1,025) were an astounding 277% above. At the monthly contracts pace, there was a 3.5 months supply of actives on the market. Accordingly, the pace of condo/coop contracts and settlements has been leveling off. Year-to-date settlements (1,553) slipped 17% and June settlements (273) dropped 25% from a year ago. As we would expect, the large inventory is taking its toll on condo/coop price appreciation. The June condo/coop average price hit $310,764 – rising only 1.4% over a year ago. And, while the June median price was up 3.2% to $283,900, we can see price appreciation rapidly softening in this market. The midpriced condos are selling, and there is a flattening in prices for the higher end units.

Recent Economic Trends

The Fed Funds rate moved to 5.25% in June. Recent economic activity suggests a slowing economy, but recent personal consumption price indexes are showing inflation considerably above the 2% maximum the Fed indicates it will tolerate. My guess is that one more increase is in the cards, with a pause after the summer to see how the economy responds. Recent real GDP growth for the second quarter slowed to 2.5%, down from a 5.6% rate in the first quarter. There’s no doubt the economy is slowing, but prices are also rising and prices are ultimately what the Fed is concerned about. To be safe, I would assume short term interest rates will still go up over the next month or so.

Consumer Prices and Energy Costs

The May 2006 consumer price index for the Washington-Baltimore metropolitan area rose by 4.2% over the same period in the prior year. For all of 2005, metro area prices increased about 4%. This figure makes sense given the level of federal spending in the area, and it shows inflation is creeping up. Based on the most recent national stats, the Consumer Price Index (CPI-U, seasonally adjusted) in June rose 0.2% from its May level – and was up 4.3% from June 2005. Energy costs declined from the previous month; but on an annual basis, June energy prices were running about 23% higher. On the bright side, food was only 2.2% higher than last June, and medical care was up a stunningly reasonable 4.1%. Most importantly, the “core” rate (food and energy excluded) rose 2.6% -- higher than it has been in recent months, and significantly above 2%.

The Bottom Line

So far, 2006 has been solid on home value appreciation, but sales are substantially weaker and eventually appreciation rates will move lower. While they are not likely to go negative for single-family homes any time soon, we could see some negative appreciation for condo/coops. Sales units will definitely be lower this year, as will be gross commissions. Interest rates will continue to rise for the near future, but the Fed will probably take a breather for a while. In a slowing market, where there is lower price appreciation and fewer sales, your job requires a lot more negotiation work. Buyers are being picky, coming in with “low-ball” offers, and demanding more home “fix-ups” to do a deal. And, there are still sellers out there who believe that asking prices should be set by taking what they were a year ago plus some percentage mark-up based on last year’s market. Your job is to get them together, but first be realistic with your sellers about prices.