North Carolina housing production and construction spending, 2003-2006

Housing: Production and Costs Survey

Housing market three years ago the housing market overview looked quite positive in North Carolina in the early 2000. According to 2000 Census, home ownership reached approximately 69.4%, which was 3.2% above the national average. Also, the family incomes rose faster than inflation, averaging 9.5% between 1990 and 2000 after adjusting for inflation (North Carolina Finance Housing Agency, 2007).

National outlook

Nationwide, the construction spending had an upward trend on 2003-2006 period (see fig. 1). The same trend was registered by both private and public constructions and within these categories by both residential and nonresidential constructions. The only category that slowed down in 2006 was private residential.

Source: U.S. Census, Accessed April

In terms of new homes constructions, the national trend was a downward one (see fig. 2). It is worth noticing here, that the upward construction spending slope was synchronized with a downward construction production slope.

Source: U.S. Census, Accessed April 08

At country level, the number of new homes production decreased from 140,000 in 2003 to 111,000 in 2006 nationwide, despite the country's economic recovery.

International and national outlook

2007 was marked by a financial crisis generated by the collapse of mortgages. The collapse had been bubbling up for a while as lenders (e.g. banks) had gotten used to lend money too easily because they became confident that they would be able to sell on the risk of default to someone else (the Economist, 2007). Consequently, the confidence in markets dropped dramatically and in those cases in which lenders couldn't distinguish between good and bad borrowers, they became reluctant to lend.

Source: cited in the Economist, 2007

The 2007 financial crisis affected the real estate market, by decreasing the market demand, which in turn led to a decrease of housing prices.

North Carolina

According to HouseHunt (2008), the buyers continue to be hold advantage over real estate sellers nationwide, as the number of the latter is higher than the formers. In North Carolina the situation follows the national trend with more sellers than buyers and market power concentrated around buyers, rather than seller. This happens for two reasons. Firstly, the buyers purchase fewer houses as the mortgage conditions worsened, creating a considerably large housing stock to sellers. Secondly, sellers had to drop their prices to match the buyers weaker purchase power. Consequently, market demand shrunk.

In 2007, the total construction spending started to decrease gradually, between 0.5% and 1.5% from one month to the next, roughly 12% per year. The construction production in the same year maintained its decreasing pace to 10% per year (U.S. Census, Accessed April 08). For the first time since 2003, the construction spending and production had similar trends, despite the fact that it was expected for the construction production trend to be reverted to a more positive situation. On the other side, we could notice that since spending is decreasing and production is maintaining its normal trend, unit construction costs are decreasing, which could increase production in the future.

The construction spending/unit costs are not the only factors to influence construction production in the U.S. market in general or North Carolina in particular. For instance, mortgage market trends have a deep impact on construction production as these trends can easily shrink or expand market demand. Other factors to be considered are demographics and labor market as they can also influence market demand.

III. Future Trends in the Housing Market

The housing market is influenced by a large number of factors that need to be taken under consideration when estimating future trends.

Riche (2003) takes under consideration demographic factors when forecasting the future housing demand. These factors include aging population, the increasing minority population and income. Thus, on one hand U.S. should expect housing ownership to grow rather than rent, as the increasing older population segment is likely to prefer the former option. Also, the number of households is likely to grow given increased life expectancy. Riche (2003) suggests that professional will be challenged to find new ways to accommodate a greater variety of household types. On the other hand, although minority population is growing and its number of households, this population segment tends to have lower income and therefore a lower purchase power. Moreover, the average age of minority households is below the local one, which is an extra reason for low income. The study's conclusion was that based on the chosen demographic factors, it is difficult to predict with accuracy future housing trends.

Barry Chiswick and Paul Miller (2003) analyze the immigrant participation to the housing market vs. local population. They also test a series of factors such as language, location and proximity to country of origin against settlement patterns. The paper is focused on determining housing concentration, while taking under consideration the immigration phenomenon. However, it doesn't predict the housing production and its costs in the future.

Finally, George Masnick and Zhu Xiao Di (2003) use the Potential Housing Demand (PHD) model created by the Joint Center for Housing Studies to estimate future housing trends based on past and future immigration. The paper concedes that the housing demand should increase as immigration increases, but the demand won't be evenly spread across U.S.' territory, but rather on certain locations with language similarities or which offer improved employment opportunities, to this segment.

Based on the above studies and demographic trends it can be concluded that housing demand is going to increase in the future. In terms of construction production, this translates into an increase as well.

Housing production costs are difficult to estimate in the future. Recent figures from the National Association of Realtors (2007), indicate that resale prices are falling for houses and maintaining for houses across the country and decreasing in both categories in the southern part of the country, which could put pressure on producers to employ construction methods meant to reduce costs. The construction spending trends suggest that unit costs are slowly falling for new home constructions, which comes to confirm the reselling trends.

To conclude, demographic trends will be essential in the future to estimate the housing market on a longer period of time. The population movements in terms of age, migration, income or any other demographic item will have its influence on the market demand and housing consumption habits. Recent production and production costs trends point to an increase of production and a decrease of unit costs, which makes sense given technological upgrades and learning curves. However, these trends haven't yet been correlated to demographic factors to estimate the housing market in the near future.

Reference List

Chiswick, Barry and Paul Miller (2003), "Issue Paper on the Impact of Immigration for Housing," HUD - U.S. Department of Housing and Urban Development.

HouseHunt (2008), http://www.househuntnews.com/MCR/North-Carolina/

Masnik, George and Zhu Xiao Di (2003), "A Sensitivity Analysis," HUD - U.S. Department of Housing and Urban Development.

National Association of Realtors, (2007), http://www.realtor.com/

North Carolina Housing Finance Agency (2007), "The State of Housing in North Carolina," www.nchfa.com/

Riche, Martha Farnsworth (2003), "How Changes in the Nation's Age and Household Structure Will Reshape Housing Demand in the 21st Century," PhD, HUD - U.S. Department of Housing and Urban Development.

The Economist (2007), "Surviving the Markets," August 18th, www.economist.com

US Census, www.census.gov

FED - Federal Reserve "is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system" www.federalreserve.gov

ECB - European Central Bank "The ECB is the central bank for Europe's single currency, the euro. The ECB's main task is to maintain the euro's purchasing power and thus price stability in the euro area" www.ecb.int

In 2003, North Carolina represented 23.4% of the South Atlantic region of U.S., being the second largest after Florida.

In 2004, North Carolina dropped his share of new home construction in the Southern Atlantic region from 23.4% in 2003 to 18.7%. The state continued to be the 2nd largest in the region after Florida.

In 2005, North Carolina dropped his share of new home construction in the Southern Atlantic region from 18.7% in 2004 to 14.5%. The state continued to be the 2nd largest in the region after Florida.

In 2006, North Carolina slightly increased his share of new home construction in the Southern Atlantic region from 14.5% in 2005 to 14.9% maintaining his follower position after Florida.

Also, the inter-bank rates grew overnight, which eventually led to an increase of mortgage rates (see chart) on both U.S. And Europe. The rate jumped to 6% in U.S., 0.75 points above FED's1 5.25% target and in Europe it jumped to 4.7%, 0.7 points above ECB's2 4% target.