February 20, 2008 — Delayed Reaction

A balance between economic growth and residential development has helped Charlotte's housing market escape the doldrums. Until now.
By Charles Gerena

Charlotte, N.C., recently earned the dubious distinction of America's ninth most miserable city from Forbes Magazine. Among the
150 largest metro areas, it ranked poorly in six categories and worst in violent crimes per capita.

Yet Charlotte's residential housing market had been doing better than many major metropolitan areas. While sales have been declining and the gap between list prices and selling prices has widened in recent months, prices have generally risen throughout 2007 and early January 2008. In contrast, other metro areas in the West and Midwest have experienced dramatic declines in home values. In Charlotte, economic growth and residential development appear to have stayed relatively balanced.

Bernard Helm is president of a consulting firm in Rocky Mount, N.C., that tracks residential construction throughout Virginia and the Carolinas. His theory is that a healthy economy brought people to Charlotte, but not at such a rapid pace that a lot of speculative investors jumped into the housing market and drove prices through the roof.

Today, Helm sees Charlotte's market as a mixed bag. New mortgage products brought a lot of future demand — buyers who wouldn't be ready to purchase a house for six months or more — into the present, "thereby stealing next year's buyers." Now there aren't enough buyers in the market to absorb the current inventory.

"Population growth is a gradual process. It's not going to have any measurable impact [on the housing market] for a period of five to
10 years," Helms explains. In addition, a lot of the buyers who were enticed into buying a home sooner rather than later may not return to the housing market in the near future. The marginal buyers may feel embittered, or they may be unable to get a mortgage due to tightening credit conditions.

Meanwhile, the supply of homes for sale in Charlotte has grown. Repossessed homes are being sold at distressed prices while other homes are being sold under duress. "There are a lot of things going on that have made the resale market very competitive, particularly in price ranges below $250,000," Helms says.

For now, most new homes above $350,000 are still growing in value by Helm's estimation. However, high-end existing homes are losing traction as builders with new inventory in the higher price ranges offer discounts. "The marketplace is perceiving better values in the new homes than they are in the resale homes," he notes.

Richard Buttimer, an associate professor of finance and real estate at the University of North Carolina-Charlotte, has a slightly different hypothesis to explain the relative strength of Charlotte's housing market. He agrees that economic growth, along with a relatively low cost of housing, fueled population growth. But at the same time, new land became viable for residential development when 20 miles of Interstate 495 were completed in the northeast corner of the metro region in 2003.

"It opened up a tremendous number of smaller communities to become bedroom communities for Charlotte," Buttimer notes, including towns like Concord where population growth accelerated between 2003 and 2006. "People just substituted the cheaper prices in these [communities] instead of bidding on the same houses [in Charlotte] that would have gone up in price." Although they started from a lower base, home prices spiked to the region's average.

Also, Charlotte's ability to annex surrounding unincorporated land has enabled the city to absorb a growing population. "There has been a lot of redevelopment around the city core," especially south and east of downtown, Buttimer adds. "I suspect that has helped as well."

Buttimer also concurs with Helm that Charlotte didn't experience a spike in speculative activity. Housing prices have been roughly in line with what he'd expect with the region's population growth. "There hasn't been any real deviation from the fundamentals," he says. "I don't think there's a bubble to correct."

Despite Charlotte's poor showing on Forbes' miserable cities survey, people move to a community for a variety of reasons. So, even though Charlotte ranked in the bottom 50 percent on its commute times and weather, enough people considered it relatively attractive compared to bigger cities like Los Angeles and moved there. But not too many.

Charles Gerena is the online editor for the Richmond Fed's Research Department.