November/December 2007

By Peter Clute and Fred Kendrick

The DC Big Picture

The number of new contracts for singlefamily homes, condominiums and cooperatives fell sharply in August, reflecting in part a traditionally slow part of the season, but even more so the major impact of the mortgage credit issues which roiled the financial markets during the month. The problems that started with the subprime lending market led to uncertainty and tightened lending standards in the larger market. Many buyers found it difficult to obtain mortgages that had been readily available in the past, while others wait on the sidelines until the market stabilizes.

In August, total residential sales contracts fell by 23% from July and 17% from a year ago. In comparison, the decline in 2006 from July to August was a much more normal 7%. More striking is the fact that this is the first time since 1998 that combined sales of homes and units fell below the threshold of 600 contracts in the month of August.

For the year-to-date, sales trail the first eight months of 2006 by 2% and 2005 by 18%. One month ago the number of new contracts was actually ahead of the prior year by 1%. There has been a marked difference between single family and condo/co-op sales that has prevailed throughout the year. Every price range with one exception ($150,000 to $200,000) on the condo and co-op side shows gains over 2006, while only two price categories (below $150,000 and $800,000 to $1 million) are ahead on the single family side.

While the number of condo and co-op units on the market at the end of August is 12% lower than a year ago, the inventory of available homes has grown by 8%. Largely because of the sharp decline in sales, the effective inventory (the number of properties for sale divided by new contracts in the month) now stands at 5.26 months which is by far the highest figure this year. At the beginning of 2007 the level was 3 months and a month ago it was 4.1 months. In comparison, the National Association of Realtors ® reports that the national inventory figure is 9.6 months.

Another measure of the current market is how long properties are taking to sell. In August the average days on market was 65 compared to 57 a year ago and only 28 days in 2005.

For the first time this year, average sales prices in August showed a slight decline from the previous month. Since increases and decreases in prices typically trail those of sales by several months, it is more than likely that we will see further price declines in the months ahead. While this is not good news for sellers it certainly is for buyers and is probably a necessary correction for the sales market to improve.

Single Family

New sales contracts fell 21% from both July of this year and August of last year. They are down more than 40% from August of 2005. These loses have been felt in almost every price range of homes.

Eight months into 2007, sales are nearly 12% lower than a year ago at this time and are off 33% from the peak of the single family market in mid 2004. Homes priced from $800,000 to $1 million are the only ones to have shown consistent sales gains so far this year. Surprisingly, the limited supply of homes priced below $150,000 has shown a resurgence this year aided by a big upturn of sales in August. All other price ranges are down and most by double digit amounts.

Fortunately, with sales falling so too did the number of new listings coming on the market in August (down 6% from a year ago). Although the inventory is now up to a high for the year of 5.8 months, there are actually fewer homes for sale entering September than a year ago in several price ranges: $800,000 to $1 million and $1,250,000 to $1,500,000.

The average price of homes sold since the beginning of this year fell by1% from July to August. While the year-to-date gain is 6%, this is the first time this index has shown a decline this year.

Condominiums and Cooperatives

The number of new contracts on condominiums and cooperatives fell 25% from July to August and was down 14% from August of 2006. This is the first time in 2007 that a monthly sales total has dropped below 2006 levels. Despite the sharp decline in August, year-to-date sales of condos and coops are ahead of 2006 by 9%, with nine out of thirteen price categories registering double-digit gains. This is still the second best sales year since 1990, trailing only 2005 by a margin of 5%.

However, with a generally slower real estate market in 2007, developers have been putting a number of condo projects into the MRIS that would not have been entered in the stronger markets of 2004 and 2005. Also we are now seeing the first re-sales, many from speculators, that were purchased in buildings constructed or renovated in the last few years. Taken together this has boosted the number of sales and also the inventory of available units being reported through the MRIS. The net result is actually a weaker condo market than the sales numbers otherwise suggest.

The number of available units fell 3% from July and is 12% below the same point last year. The effective inventory, now at 4.77 months, is at the highest point of the year and at the highest level since September of last year (5.87 months).

The average and median condo/co-op prices both saw a small decline of less than 1% for the month of August. For the year, 2007 prices are ahead of year-end 2006 by 1%.