January/February 2006

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

Maryland real estate will likely set new sales and price records this year; Montgomery County will set new price records. Through November, Maryland cumulative unit volume of 97,868 sales (all residential property types) was up 7% (over the same period in 2004). Also, prices averaged $334,859 statewide — almost 18.5% over the same period in 2004.

The November stats show Montgomery County leading Maryland in sales with a cumulative total of 15,618 units (16% of state unit sales). But county year-to-date settlements (single-family and condo-coops) are down about 2% from the first 11 months of 2004. Nevertheless, average prices are still up double-digits over a year ago. Year- to-date prices for all units averaged about $505,000 and were 18% above the same time last year. November prices across all sales averaged nearly $504,300 — a 17% bump over November 2004. The slight decline in buyer demand in the second half of 2005 likely reflects the high price appreciation in the county and the rising costs of financing.


High and rising prices have continued to spur listings of single-family homes. But the contract and sales side of the transactions have slowed below last year at this time. For single-family homes in November, there were 1,152 new listings — up 22% from November 2004. And the 2,385 total active listings were 75% above the levels of a year ago. But year-to-date contracts (12,501) were down 4%, and November contracts dropped 19% from the levels of 2004. Similarly, new and year-to-date settlements have declined from where they were last November. Year-to-date settlements (12,200) were down 2%, and November settled sales (842) dropped 19% compared to a year before.

On the other hand, the price news has been fantastic! November single-family home prices averaged $560,327 – maintaining a differential of 17% over a year ago. The median price came in at $465,000 with a jump of 18.6% above its 2004 value. Summing up: the November single-family market is softer on the sales side compared to a year ago; but there is plenty of product to sell. And, although the number of buyers has slipped since the end of the summer, prices have still maintained their torrid double-digit pace compared to 2004. You should expect continued softness in single-family sales in 2006, and slower rates of price appreciation.


The story for the condo-coop market is similar to the single-family market. November condominium and cooperative settlements (238) were down nearly 16% from a year ago, but prices continued to rise at high double-digit rates compared to 2004. Again, listings are up so there is plenty of inventory, and there is a strong competition for buyers. Compared to a year ago, November new listings (378) jumped 18% with total actives (715) up a whopping 119% from a year ago. At the November contracts pace, there was slightly over a three-month supply on the market.

As in the late summer single-family market, condo/coop contracts are continuing to slip compared to this time last year. Year-to-date they decreased about 6%, and the November monthly contracts dropped 25% compared to a year ago. The news is similar for the settlement side, but less severe. While year-to-date settlements have continued to slip from the late summer, they are down only 2% with the monthly settlements dropping almost 16% compared to 2004. There will be continued slowing in the market through the early spring; and, a three-month supply of inventory is likely to keep the lid on price jumps.

But even with sales slipping, the wealth and economic strength of the county and general metro area are continuing to support strong price appreciation. In November, the average condo/coop hit $306,041 – a 19% leap over a year ago. Median prices ratcheted up 23% to $275,000. While there will be continued softness in the condo-coop market, in 2006 there will still be price appreciation, though not at the high rates we have seen.


The Fed pushed the Fed Funds target rate to 4.25% and there will be at least one more increase to 4.5% in late January – Alan Greenspan’s last task at the Federal Reserve. While consumer price rises have moderated, there are still fears regarding the affect of high energy costs creating inflation down the line. However the housing sector is still going strong based on the November housing starts and permits data.

Analysts are split on whether the Fed will push the rate further to 4.75% in March; that will depend on the new chairman Bernanke and the intervening economic data. However, financial regulators are starting to crack-down on some of the more exotic mortgages that make it easier for borrowers to get into housing, and this should also contribute to less affordable financing in 2006. Nevertheless, interest rates should still be reasonable, compared to historical values.


The CPI for November indicated that overall consumer inflation has been running at about a 3.5% annual rate, due primarily to energy costs. Energy was up 20%, food rose 2.2%, and medical care was up 4.5% compared to the previous November. However, when we exclude food and energy from the total, we find that the “core” inflation rate is still only about 2.1%. November personal income and consumption expenditures have also been rising, so consumers have money and are spending it.

Recent gasoline prices have started to move up toward the mid-$2 range locally, but are not hitting the highs that were experienced after Katrina. Re-building, refining and off-loading capacity in the gulf and near New Orleans has been slower than expected, so gas prices will still jump around a bit, depending on demand and weather. Projections for the cost of natural gas are still high, with analysts forecasting about a 38% rise over costs a year ago. The demand from China and Asia in general will continue to put pressure on energy costs throughout the decade. Energy and environment will continue to be big economic issues as we face difficulties in expanding domestic supply. Properties that are more energy efficient will increasingly become more valuable, as well as locations near public transportation networks.


The year 2005 will set a new Montgomery County price record, but the unit sales aspect of the market will not, and will likely further soften into 2006. There definitely has been a change in the market psyche — everywhere buyers are getting tougher and sellers are wondering why their houses aren’t selling as fast. Multiple offers and bidding-wars are a thing of the past. However, Montgomery County is in such great economic shape that there is little risk of a localized recession or sharp housing sales or price declines. A continuing affordability squeeze and tighter financial conditions in 2006 will tend to slow the unit sales pace. Price appreciation will be positive, but at slower rates.