November/December 2007

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

The Maryland Big Picture

The Maryland Association of Realtors ® statistics from MRIS through August show total unit sales of 45,434 homes -- down 18% from a year ago. The correction in the state’s housing sales market continues, but prices have held their ground, although the appreciation rate average is gradually slipping. Through August prices averaged $366,218 -- up 2.4%. Rising somewhat slower, the median price averaged $313,528 – about 1.3% higher than in the first eight months of 2006. The strong job market and wealthy economic base in Maryland is helping maintain prices. Furthermore, Montgomery County prices are doing better than the state’s average. On the other side of the coin, the county’s sales through August have dropped at a slightly faster rate than for the state as a whole.

Single-Family Homes

So far this year, sales of Montgomery County single-family homes continue to trend downward compared to a year ago. Year-to-date August contracts (5,952) were 20% below August 2006 and settlements (5,898) were down 17%. Inventory is still up significantly from a year ago – the 4,319 total active listings were 13% above the level of August 2006. However, new additions to the supply for August were down 16% from a year ago, so there is hope supply will eventually catch up with demand. August monthly activity showed a strong downside pattern for contracts and settlements. Single-family contracts totaled 528 homes, plunging 41% from August 2006; and, the 707 settlements dropped 25% below those of a year before. The recent additions to inventory have been flattening out, but the single-family actives imply an 8.2-month supply at August’s contract pace. The slowing sales rate at the end of summer market is putting pressure on sellers to lower prices, as time on the market is now lengthening. However, sales units and overall dollar volume would likely be performing better if prices would decline. Irrespective of the large supply overhang, price appreciation in August was astounding. August prices in the county averaged $630,101, up 6.1% from a year before and higher than the annualized appreciation rate for July. Similarly for the median price, the August figure of $512,000 was 5.6% higher than a year before. Montgomery County has continued to be a high-income suburb in the DC metro and the local growth and job market continues to fuel housing prices.

Condominiums and Cooperatives

August condominium and co-op sales were also down significantly, but prices still showed positive appreciation compared to a year before. Year-to-date (ytd) contracts totaled 1,766 units, down 20% from a year before, but the monthly pace is declining at a more rapid rate. In parallel, August ytd settlements totaled 1,737 properties, and they had dropped 18% from a year before. For the month, the 200 condo/co-op settlements sank 20% below those of August 2006. Compounding the selling problems, total active listings are up almost 13% from 2006. Higher-end properties have seemed to have done better price-wise. The average price of $326,975 bumped 5.4% above August 2006; but, the middle of the price distribution saw a much lower appreciation rate. The $288,000 median price was only about 1.4% higher than a year ago, documenting the affordability problems of middle- and moderate-income families. An active listings supply of 1,161 was still up from a year before, but the monthly addition seems to be leveling-off. At the August contracts pace, total actives constituted a 6.3 months supply. This time frame is longer than in July, as the slowing sales rate would take longer to burn through the inventory. There was some good news on the listings front: new listings (373) were down 19% from a year ago, and this will cause sellers to be pressured to drop prices as winter approaches.

Recent Economic Trends

At the end of September, the final estimate for second quarter growth was released. While the first quarter grew at a 0.6% annualized rate, the second quarter came in significantly better at 3.8%. So far, the first half of the year has averaged 2.2%, a below-trend rate, and the Fed has to be concerned about this. During the fourth quarter of 2006, GDP grew by only 2.1% on an annual basis. Most economists still expect 2007 growth to fall in the 2% to 2.5% range, but a lot is riding on the third and fourth quarters. Accordingly, some financial mavens are starting to ‘predict’ a recession in 2008 -- but there is probably only a 30% to 40% chance. The Washington, DC metro area should be expected to do better than the rest of the country, but local real estate is not likely to get much economic support beyond the current situation. The loss of risky subprime/Alt-A loans has eliminated a significant segment of recent markets for the foreseeable future.

Consumer Prices and Energy Costs

The August Consumer Price Index declined from July, and was only 2% higher than a year before. Among the various components, housing costs were up only 2.9%, reflecting the real estate slump. Retail apparel prices declined 1.4%; energy declined 2.5%; and, medical care still rose 4.5%. Topping the news was the fact that the August ‘core’ index (excluding food and energy) rose only 2.1% from a year before. While, this ‘core’ rate is still above the Fed’s comfort range, the closeness to the magic ‘2%’ helps the Fed move to a policy of easing up on interest rates. Even better, was the result for the recently released ‘core’ Personal Consumption Expenditures Index, the Fed’s preferred inflation measure. In August, on an annual basis, it was up only 1.8%, so there has been improvement on the inflation front; and, since June we have had three months below the 2% mark. Inflation does seem to be trending downward, and the Fed has reason to be optimistic. Now it appears that the 2007 CPI will probably land in the 2.1% to 2.4% range with ‘core’ inflation slightly under 2%.

The Fed and Mortgage Rates

In August, the Fed again left the Fed Funds target rate at 5.25%, indicating some progress on inflation, but that it is still a major risk. In September, the Fed lowered the Fed Funds target rate by half a percentage point (50 basis points) to 4.75%, and also lowered the discount window rate to 5.25%. This was due to concerns about the housing sector and the possibility that the problems with subprime loans would spread to the rest of the economy. They still indicated that inflation was a major risk, but the implication was that financial problems were a more immediate threat. While the Fed specifically noted its concern about credit market tightening due to the housing recession, it still has its eye on inflation and that will affect any more declines in rates. The Fed rate decline will help adjustable mortgage rates, but overall bond market functioning will determine the longer-term rates. It will take a few weeks to accurately measure the impacts on closed loan mortgage rates. The late-September Freddie Mac surveys showed rates at about the same levels from the end of August, but lower than in early August. In the most recent survey, national average 30-year contract rates were about 6.42% with 1-year adjustable rate mortgages (ARMs) averaging 5.60%. Fifteen year loans averaged 6.09%, with 5/1-yr. ARMs at 6.15%. At the beginning of 2007, the 30-year loan rate was 6.18% and one-year ARMs were 5.42%. Although all rates have gone up considerably from the beginning of the year, they are still reasonable compared with recent history. Now that the Fed has started pushing rates down, this will provide some help to homebuyers using standard instruments. The parts of the market that has been lost are the low/moderate income and high credit-risk groups. Unfortunately these buyers will be locked-out, and many that already have high adjusting rates will face future difficulties in finding new financing. ARMs should stay in the 5.5% to 5.7% range, with 30-year fixed loans in the 6.4% to 6.5% interval over the next few weeks. They could go lower in a few weeks after the next Fed meeting, but that is not guaranteed.

The Bottom Line

Montgomery County prices are holding on very well, with single family and average condo prices beating the state and national averages. Double-digit declines in unit sales will continue, but price appreciation has been holding up remarkably. The problem is finding enough qualified buyers for the available inventory. The recent turmoil in financial markets will put some upward pressure on interest rates, but will not cause the sales market to drop at a faster rate than we have seen so far. However, price appreciation will gradually diminish below recent levels by the end of the year. The best prediction is for more of the same. So, hang tough, the “correction” will likely continue into 2008 as well.