Point of view

Big houses, big inventory

February 9, 2010 

— Many real estate professionals have expressed optimism about the Triangle housing market, believing it to be relatively impervious to the adverse effects of the housing bubble. The argument is that job growth here has been robust and that we did not see a dramatic rise in home prices like that which occurred in other metropolitan areas, including Washington, D.C., and Los Angeles, so any decrease in home values here will be moderate.

Unfortunately, the housing market here is indeed different, but it is not impervious to the laws of supply and demand. Absent significant price reductions for homes on the market, especially those at the higher end, I conclude that Raleigh's real estate market will continue to languish.

When the demand for homes in the U.S. increased beginning in the late 1990s, different areas were affected differently, based primarily on the availability of land and the existence of growth controls limiting new construction. As demand for housing increased, if builders and developers were restricted from building new homes, housing supply failed to keep up with the increased demand, which caused prices in those areas to inflate significantly. If, however, an area lacked regulatory growth controls and there was plenty of open space on which to build, developers were able to add a sufficient supply of homes to meet this new demand. In these areas prices remained relatively stable.

Wake County is seemingly representative of the latter. With an abundance of open space and auspiciously absent growth controls restricting new residential development, builders were able to increase the stock of housing. In fact, they overbuilt.

Data collected from the Wake County Treasurer's Office show that new home sales increased from just under 9,600 in 2002 to about 14,600 homes in 2006. And although the population in Wake County increased during this time, the growth in the housing stock in Wake County outpaced population growth by 11 percentage points.

Given this excess inventory of homes, adjusted for inflation the median home price in Wake County should have declined relative to its 2002 price. As yet, it has not.

Beginning in the early 2000s, Wake County was an attractive destination for people leaving the Washington, New York City, Chicago and L.A. metro areas, as well as other areas north and westward. Tens of thousands of people moved to the Triangle from areas affected by the housing bubble, having sold homes at prices two and three times what they paid for them just a decade or so earlier. With the equity from their real estate windfall, these people moved to Wake County and demanded new homes - big homes.

Builders obliged. The market share of new homes sold in Wake County at price points of $400,000 and above increased nearly threefold, from 8.24 percent in 2002 to 22.83 percent in 2008. Meanwhile, the share of homes priced between $100,000 and $200,000 plummeted from 60 percent of all new homes sold in 2002 to less than 30 percent in 2008.

Builders responded to the increased demand for larger and more expensive homes by shifting production from homes affordable to the median-income household in Wake County to more expensive homes affordable to those with incomes well above the median or to those with considerable equity to make a sizable down payment on a home. After the bubble popped in 2006, the in-migration of people to the Triangle with large sums of money slowed, greatly diminishing demand for larger homes.

Today there is an excess inventory of homes in Wake County, primarily at prices above $400,000. For homes priced in excess of $700,000, there are more currently on the market than sold in all of 2009, a fairly typical year for residential real estate in Wake County prior to 2004. For homes priced between $400,000 and $700,000 it's only slightly better, with current inventories running about 80 percent and more of what was sold during all of 2009. These inventories are expected to continue growing throughout 2010.

Eliminating this inventory is not a matter of waiting for economic recovery; the median-income household cannot afford the median home currently on the market. And although prices have fallen some over the past two years, with the median home price declining around 10 percent from its peak in 2008, there is still a considerable ways to go before we see any substantial decrease in the current inventory, especially at the higher end of the market.

Mark Steckbeck is an assistant professor of economics at Campbell University.

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