Want to know when the real estate market will recover? Read on. 

The real estate market is like any other free market mechanism . . . it reacts to a variety of forces in the general economy. I wish I could explain with precision what exactly happened, what caused it and when it will get better. The best answer I can provide is that it won’t get better anytime soon and certainly not soon enough for anyone wanting to move in the next year or two – unless – they are willing to accept the current reality of the market and act accordingly. Don’t forget, if you sell in this market and buy in this market you could very well come out ahead. Time is the determining variable as to how far ahead you will end up. The current market is no problem for a homeowner with a flexible time horizon. Eventually things will come back to a more acceptable “normal” level. But, even when it does, the one thing about the real estate market is that it is rarely in equilibrium and is often just on its way to a new higher or lower level.

One of the best tools we have to predict the type of market we have to deal with is the number of active listings and the number of sales that occur each month. Combine these figures and you will get an indication of the nature of the market and who it favors – buyers or sellers. For example, in June of 2005, the beginning of the market turn, there were 2,243 homes for sale and that month 2,040 homes sold. In contrast, in June of 2008 there were 6,710 homes for sale and only 909 sales or 13.5% of the available inventory of homes vs. 90.9% in June of 2005. You don’t need to be Alan Greenspan to grasp the problem! If you’d like more information visit marychartersandassociates.com/local-market.asp or email info@mcharters.com with “Market Stats” in the subject line.

The oldest data we have goes back to January of 1992 when there were 4,210 homes for sale and only 591 sold that month or only 14%. You would have to go back even further to find the last boom market but it took 8 years from that point for the inventory to get into the “boom” territory of about 2,000 homes for sale and we did not have the financial instability in the economy overall and mortgage markets in particular to exacerbate the house market woes. In addition, the number of foreclosures that are yet to come mean additional inventory at distressed prices that must be absorbed. And this is a very large number! As of July 08, 6,759,049 homes were considered “in distress”, i.e. in pre-foreclosure and 70% of active delinquent adjustable rate mortgage loans were in default BEFORE their interest rates had reset! This represents a wave of foreclosures that has yet to reach shore and, of course, when they do it will put additional downward pressure on home prices.

Another look at the graph shows that, in June of 2005, active home inventory in Montgomery County was a little over 2,000. It started to climb from that point reaching 6,710 by June of 2008. In June of 2005 sales represented over 90% of the active homes for sale. In June of 2008 that number had declined to 13.5% representing over 7 months of supply. Inventory remains over 6,500 homes for sale.

There is no way to predict how high inventory will climb but as long as the spread between available homes for sale and homes sold each month remains this large and the absorption rate is in the 7-8 month range and higher there cannot be a “recovery” and the chance of seeing another boom market like the one we just came out of is less than slim. We are 3 years into this slowdown. The last slowdown that resembled this one took over 8 years to “correct” and it did not have the unfortunate circumstance of a financial mess to fuel it on. I don’t know when the market will begin to normalize and I don’t really think anyone else can predict it either but I don’t see anything that would cause it to take less time than the last slowdown which leaves us with at least 5 more years to go and more likely 7 or more years. On the contrary, market conditions, financial conditions and existing as well as more problematic pending foreclosures appear to be factors that will extend the recovery time. 2013 to 2015 look like the best case to expect absorption rates that are more market friendly.

Active Listings and Sales Montgomery County, MD

Percent of Sales to Active Listings Montgomery County, MD

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