Approximately 6 months ago, Frederick County entered a split market. A split market is where one section of the market is doing much better than other sections of the market. In our current case, houses under $300,000 have generally stopped declining in value and prices have stabilized. However, market data indicates houses above $400,000 are still declining in value at a rate of approximately 1/2 of 1% per month.

We have seen “split markets” before. The most recent split market occurred in 1992. The market had been rapidly increasing until October 1989. The market declined from 1989 until 1992 and then entered a split market where the lower priced housing no longer was declining in value; however, the higher priced homes were still declining.

It is important to understand that there are three types of markets: a down market, a flat
market and an up market. You can’t go from a down market directly into an up market. You have to have a leveling off period. Inversely, you cannot have a market that is rapidly appreciating and then immediately turns downward. There has to be a flat market in between. This flat market can exist for a relatively short period of time, which is typically a minimum of nine months. Or it can be a relatively long period time such as our last flat market (1992 until 1997), which was five years.

Property values have been declining since June 2005,so we have seen declining values for almost five years. For about the last twelve months, prices have not declined as rapidly as they had previously. (The economy is still tough. The bank returned my check marked “insufficient funds”. I called and said me or you?) In a normal market, the sellers of the lower priced homes move up and buy a middle priced home; the middle priced buyer then moves up to a larger, more expensive home; and the seller of the large house buys a farm or large executive custom home.

What we are seeing now is that many of the sellers of the lower priced houses are not moving up. They are either “crabbing” sideways and buying in the same price range, or they are renting or moving in with their parents, etc. There are still some move-up buyers; however it appears that the majority of the sellers of the low end housing are not moving up as times are tough. (It’s also hard to stay married these days. My wife kisses the dog on the lips, yet she won’t drink out of my glass!) This is what’s causing this split market and making the low end market very good while the middle and upper markets suffer.

Raw land sales and farm properties have not experienced as sharp a decline in value as single family residences due to the limited supply. However, it should be noted that farms which have extensive dairy facilities have declined as there simply is little demand for dairy production due to the low cost of milk and the fact that it is extremely difficult to make a living as a farmer (bed and breakfast properties are experiencing the same thing).

The category which has gotten hit the hardest is residential building lots. Residential building lots have declined by almost 50% from their record level peak prices in June 2005. That is because builders are not building as there is no profit in the “spec house” industry. (News Flash: The Olympic Board of Directors has relinquished Lindsey Vonn’s gold medal in skiing and has given the gold medal to residential building lots in Frederick County as their values are going downhill faster).

Many builders are now buying foreclosure properties, fixing then up and reselling. From 6/2001 to 6/2005, property values increased at a rate of 20% per year. That’s a total of 80% in 4 years. I hope I never see 20% appreciation again in my lifetime because you end up paying for it later. Will property values start to go back up in 2010? Probably not until the 3rd or 4th quarter if it happens at all. I wouldn’t break out the Veuve Clicquot and Cuban Monte Cristo #4’s just yet.

Interest rates are the key factor. Inventory is at 1,128, which is good. But job stability and National Debt are huge concerns.

Courtesy of Frederick County Association of Realtors