March/April 2007

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

The Maryland Big Picture

Based on the statistics through December 2006, preliminary figures show total unit sales in Maryland were 79,056 homes — down over 21% from nearly 100,000 units in 2005. The year 2006 witnessed a major correction in sales with significant adjustments in price appreciation as well. But, despite the unit sales correction, prices averaged over $357,000 (a 5.6% rise) and the median price averaged almost $308,500 — 7% higher than in 2005.

Single-Family Homes

As far as Montgomery County total sales volume, the year ended on a blue note. Year-to-date December 2006 contracts (10,315) were below the 2005 period by 21% and settlements (10,294) were down 21.9%. And, the listing inventory was still significantly higher than at the end of 2005. Total actives of 2,581 homes were 51.6% above the level of December 2005, so the large inventory was still with us. However, there was good news on the price front. December average prices ($593,801) were up almost 5.4% and the median ($485,000) rose 4.3% higher than in December 2005.

For the first month of this year, the news for sales units was up. January single-family contracts totaled 769 homes, 1.2% above January 2006. However, January settlements came in at 543 properties — 2.5% below those of a year ago. On the supply side, new listings were down 1.4% from January 2006, with 1,168 new properties. But the total supply is still large — actives in the multiple listing service totaled 2,571 and were about 39% above the January 2007 level.

The market correction in 2006 has taken its toll on recent price appreciation. While the average single-family price in January ($611,443) was up 2.97% above a year ago, the median price ($480,000) slipped about 1% from January 2006. As far as average priced properties, buyers in the top half of the market are still able to pay more than a year ago; but, at the middle-range of home prices, budgets are tighter and we are seeing some slippage in prices.

Condominiums and Cooperatives

Through December 2006, condo-coop units settled year-to-date totaled 2,995 properties, down 18% from 2006. And, December settlements were 4.3% below the December 2005 number. However, the average price of $310,319 was still 1.2% above December 2006; the $284,000 median almost 3.3% higher. Active listing supply was still above the 2005 end-of-year by about 40%.

The January 2007 market, so far has seen a continuation of the downward trend in condominium and coop sales. Contracts for January totaled 235 units, down 11% from a year ago. Similarly, settlements (146) dropped almost 16%. The supply of 848 actives was still up 29% from January 2006; however, new listings slipped about 4% to only 400 units.

The large supply has hurt appreciation, but prices are still hanging in there. The average for January was $311,396 and the median price was $285,000. Both of these figures were above the January 2006 prices, but by less than onehalf of a percent. We’ll have to see what happens down the line, but so far the market is barely hanging onto any appreciation over last year.

Recent Economic Trends

National economic growth in 2006 pleasantly surprised virtually all economy watchers. While the third quarter real GDP growth was only 2%, the fourth quarter preliminary figure came in at 3.5%. In 2006, the economy grew by 3.4% — faster than the 3.2% expansion in 2005. Accordingly, economists are concluding that the housing slow down has not hurt the economy that much and that businesses and consumers are still optimistic and spending. Current forecasts for 2007 real economic growth are hovering in the range of 2% to 3%.

Overall, Maryland’s economy still is performing well. Maryland personal income rose in the third quarter, and the growth rate was close to that for the nation as a whole.

Maryland total personal income grew at a 5.6% compounded annual rate, compared to 5.7% for the entire country. Income should grow at about the same rate in 2007. The unemployment rate for December (seasonally adjusted) was 3.9%, a slight decrease from the summer months. The comparable national figure was 4.5%. Maryland unemployment rates should hover around the 4% mark through 2007.

Consumer Prices and Energy Costs

The national Consumer Price Index for December was only 2.5% higher than a year before, but it rose one-half of a percent from November. On an annualized basis, energy costs were up 2.9%, and food increased 2.1%. The ‘core’ index (excluding food and energy) still moved up 2.6% from December 2005. For 2007, it’s expected that an economic slowdown will pull the overall CPI down into the 2.3% to 2.5% range and ‘core’ inflation around the 2% mark.

The Fed and Mortgage Rates

The Fed kept the funds rate at 5.25% in its January meeting. While the main fear is still inflation, recent figures from the Personal Consumption price index have shown core inflation to be gradually coming down into the low 2% range. This tends to bode well for future interest rates, although they are not likely to move very much. The latest February Freddie Mac survey shows mortgage rates still very affordable and long-term rates not that much higher than a year ago. National average 30-year contract rates were about 6.28% with 1-year adjustable rate mortgages (ARMs) averaging 5.49%. Fifteen year loans averaged 6.02%, with 5/1-yr. ARMs at 5.99%. At the beginning of 2006, the 30-year loan rate was 6.21% and one-year ARMs were 5.16%. ARMs should see a continuation of the range 5.4% to 5.7% with 30-year fixed loans in the 6.1% to 6.4% range.

The Bottom Line

Home sales bore the brunt of the correction this year, but prices still logged acceptable rates of appreciation. Interest rates will continue to fluctuate in narrow ranges around current values, and fears of more Fed interest rate hikes have lessened. Rates are not likely to move up much, but don’t expect any major declines in the near future. Buyers are coming back to the market, but 2007 won’t be a repeat of 2005. A lot of adjusting was done in 2006, so 2007 should be a bit better.