Tuesday, October 14, 2008

MoCo’s Great Crash, Part Two

In Part One, we made the case that Montgomery County’s real estate and construction industries together might account for one-fifth or more of the county’s private sector economic activity. And we charted how residential sales volume had fallen from $1.1 billion in June 2005 to $210 million in January 2008. Today we look at the residential construction market and find the news there to be no better.

The early parts of this decade saw significant growth in Montgomery County’s residential market. Developers were driven to build by rising home prices. According to Zillow.com, the average MoCo home value rose from under $200,000 in 1999 to over $500,000 in mid-2006. By the latter part of that period, builders were constructing several hundred residential units per month. Total construction volume averaged in the tens of millions of dollars per month and sometimes even more.

The Census Bureau data above shows that in most months, MoCo residential construction volume averages $20-40 million. But in a few months in a year, usually in the spring and/or summer, permitted volume spikes as large projects start. In 2005, residential construction volume exceeded $80 million in four months. In 2006 and 2007, residential construction volume exceeded $80 million in only two months in each year. So far in 2008, residential construction volume has not broken $80 million in any month.

Here’s another way to look at the data. In the first eight months of 2005, $527 million of residential construction was permitted by the county. In the first eight months of 2008, only $246 million was permitted – a decline of 53%. Half of the county’s residential construction market has simply disappeared.

The mass destruction of the county’s residential construction industry has no doubt contributed to the one-third decline in the county’s real property transfer taxes that we chronicled in Part One. But that is not the limit of the damage. The multiplier effects of the shutdown in construction will spread through reduced real estate agent commissions, falling settlement fees, collapsing contractor revenues and declining capital gains. All of these factors will damage income tax receipts, which account for one-third of the county’s revenues.

Worst of all, the statistics we cite in this series terminate in August 2008. The credit crisis erupted in full-blown fashion only last month. We have not seen the effect of a mass credit shortage affecting buyers, sellers, contractors and ancillary real estate businesses all at the same time since 1929.

All of the actors in Montgomery County – the politicians, the business community, the public employee unions and the taxpayers – are going to have to face this reality. There is no other choice. And for the moment, there may be no way out.