Towson University’s Outreach Blog

Thomas

Over the last two years, there has been a crisis in the real estate industry throughout the country and Maryland that has had an impact on the Maryland economy.  Commentators have criticized different actors for this housing crisis and the latest one is the Federal Reserve Bank. The main argument is that the Federal Reserve Bank kept federal interest rates too low for too long, which led people and banks to inflate the market value of houses.

In a monthly survey of business and academic economists done by the Wall Street Journal, 68% of the respondents said that low federal interest rates were partly to blame for overvaluation of the housing market. Interest rates were so low that many people were rushing to buy houses and too many people were in the business of flipping houses while banks were looking for easier ways to lend money which led to the creation of subprime mortgage loans for example.

• Interest rates were kept under 2 % from the end of 2001 to the end of 2004, and increased slowly to 5.3% until July 2007.
• At the same time, home prices became inflated in many markets throughout the country.  From the first quarter of 2001 to the first quarter of 2004, Anne Arundel County’s average home price increased from $205,046 to $309,888, a 51.1% increase.
• A very high increase given that from the first quarter of 1998 to the first quarter of 2001, the average price rose 13.3%.

Since 2007, the average prices of houses sold have declined as well as the number of houses sold.  In Anne Arundel County, the average price of settled house sales was nearly $420,000 in the third quarter of 2006 and 603 houses were sold, while in the third quarter of 2009, the average price was nearly $350,000 and 426 houses were sold.  The difference was a 16.6% decrease in the average price and 29.4 % decrease in the number of houses sold.  Some people believe that this price decrease has been the result of the Federal Reserve Bank keeping interest rates at record low levels for too long leading to the housing bubble burst.

It is hard to pinpoint the exact cause of the housing price inflation that occurred in the real estate market; but there is some truth in criticizing the Federal Reserve Bank for keeping interest rates too low for too long and thus failing to avoid a real estate bubble.  There is one thing many people can agree on, however, the real estate burst has had an impact in many aspects of the Maryland economy and helps explain some of the troubles facing Marylanders, the State government, local governments and many businesses.