Monday, October 13, 2008

MoCo’s Great Crash, Part One

There is a lot of talk about a Great Crash: that of America’s stock market. And there is a lot of talk about another Great Crash: that of America’s economy. And there is also talk about yet another Great Crash: Maryland’s budget. But there is very little talk about what may be the most locally relevant Great Crash of all: the collapse of Montgomery County’s residential real estate market. Today, the readers of MPW will see the ugly truth.

In 2006, the Census Bureau reported that the construction and real estate industries (including concrete manufacturing, materials wholesalers and retailers, real estate firms and architectural and engineering firms) accounted for 14.5% of Montgomery’s private-sector employment, 15.0% of its total private-sector payroll and 17.6% of its private-sector establishments. Those industries together rank second behind only professional, technical and scientific services in Montgomery. But those figures understate their impact on the economy. Construction and real estate activities spill over into the legal, financial, insurance and furniture retailing sectors too. The cumulative impact of all related spending could account for one-fifth or more of the county’s entire private-sector economy. And according to Montgomery County’s Department of Finance, 53% of total construction volume in the county since 2005 has occurred in the residential sector. Any way you measure it, construction and real estate – especially the residential part of those industries – is a huge part of the county’s economy.

It is huge. And it is hugely suffering.

Today, we look at residential sales volume in Montgomery County. In the 24 months between September 2004 and August 2006, 1,000 residential units or more were sold in every month except three. In the 24 months since then, the 1,000 mark was only broken four times. Let’s put it another way. In the first eight months of 2005, 11,838 residential units were traded. In the first eight months of 2008, only 5,495 units were traded – a decline of 54%. But the pain does not end there.

Montgomery County’s residential real estate market peaked in June 2005, when sales volume totaled $1.1 billion. By late 2006, sales volume had fallen to $400-500 million per month. The market tanked in January 2008 when just $210 million in volume was recorded. Monthly market volume has remained under $500 million in seven out of eight months since then.

This collapse has clearly devastated a large sector of Montgomery County’s economy. But of even more relevance for the county’s politicians is its direct impact on the county’s budget. Transfer and recordation taxes were estimated to account for $149 million (or 4%) of the county’s $4 billion in revenues this fiscal year. While these taxes are a small percentage of the county’s budget, they are a very volatile slice of it. Last year, real property transfer taxes were estimated to produce $121 million in revenues but only brought in $80 million – a gigantic 33% shortfall.

This summer, the county’s residential market began to recover a little bit. Volume rose from $210 million in January to $510 million in June, and then fell to $402 million in August. A slow recovery certainly seemed possible. But then the global credit crisis struck. Will buyers, sellers and builders find credit difficult or impossible to access? If so, will the residential market tank again? And if that happens, what will happen to the county’s budget (not to mention its employment base)?

As bad as all this might seem, there is more. Come back tomorrow for Part Two.