Author: Andrew Berger-Gross
Welcome to the September 2024 edition of NC Economy Watch: an update on what’s happening in the North Carolina economy and what it means for you, brought to you by the Labor & Economic Analysis Division (LEAD) of the NC Department of Commerce.
In this edition of NC Economy Watch, we describe some of the unusual developments we’ve seen in the housing market over the past several years. Our economy has absorbed a rapid increase in interest rates without experiencing a housing crash, but while a resilient housing market has helped us avert another recession, high interest rates and rising home values have also priced out many potential homebuyers.
The Pros and Cons of a Hot Housing Market
The way the economy has evolved since the onset of the COVID-19 pandemic has been unusual in many respects, starting with a historically deep (but brief) recession and eventually leading to the worst price inflation and the steepest rise in interest rates since the 1980s. In these turbulent times, few areas of the COVID-era economy have proven more unusual than the housing market.
The Federal Reserve hiked interest rates in early 2022 to reduce consumers’ red-hot demand for goods and services and keep a lid on rising prices. Higher interest rates typically cause declines in residential building activity as more expensive mortgages make homes less appealing to buyers. This time around, higher interest rates led to a stall in homebuilding, but not a collapse. For example, in North Carolina, the number of monthly residential building permits declined 10% from their peak in 2022, barely a drop in the bucket compared to the 70% decline we saw during the Great Recession [Figure 1]. Since then, residential building activity has returned its 2022 peak, demonstrating resilience in the face of persistently elevated interest rates.
Figure 1
More expensive mortgages and slower homebuilding would usually lead to a decline in construction employment, but this time around, higher interest rates have turned out to be no match for a growing construction sector. Construction employment in North Carolina has continued its unrelenting growth over the past several years, in sharp contrast to the Great Recession, when a devastating housing crash wiped out over one-third of all construction jobs in our state [Figure 2].
Figure 2
Of course, these trends aren’t limited to North Carolina; we’ve seen similar trends play out across the country. So, what’s going on here? Why have things turned out differently compared to previous instances of high interest rates?
- We are still dealing with the consequences of the housing crash that occurred during the Great Recession. Home construction has failed to keep up with our growing population over the past 15 years, leaving us with a depleted inventory of available housing units.
- Meanwhile, most homeowners and consumers have remained in relatively healthy financial shape. A shortage of housing amid relentless demand for homes has bolstered home values, and a strong labor market, rising stock market, and trillions of dollars in federal COVID relief have supported households and prevented the waves of foreclosures and bankruptcies that accompanied the Great Recession.
- Ongoing homebuilding activity, along with a surge of investment in manufacturing and public works projects, has kept construction workers busy and helped us avoid the types of mass layoffs that typically occur when interest rates rise.
That said, although we’ve so far managed to avoid the worst-case scenario of a recession, recent developments in the housing market have been far from painless. Housing has represented yet one more piece of the “two-track economy” that has seen some Americans flourish while others struggle. Inflated home values have helped keep homeowners financially solvent, but they’ve also prevented many individuals from being able to afford a new home. The Atlanta Fed’s Home Ownership Affordability Monitor indicates that homes are less affordable now than they’ve been in at least 18 years due to both high prices and high interest rates [Figure 3].
Figure 3
The Federal Reserve is widely expected to start lowering their benchmark interest rate this month, which could help bring down mortgage rates and provide some degree of relief for homebuyers. However, mortgage rates are unlikely to return to the rock-bottom levels we saw back in 2020, and home prices could remain near an all-time high for the foreseeable future.
It might take a dramatic new turn of events, such as a massive increase in the supply of housing, or a deep recession that lowers the demand for housing, before we see a return to pre-2021 levels of home affordability. Another path to improved affordability that is likelier than a residential building boom, and more desirable than a recession, would be a continued rise in wages that helps homebuyers catch up to the high price of housing. As we’ve learned so many times over the past several years, the future of our economy will depend largely on our ability to maintain a healthy, balanced, and growing labor market.
For inquiries and requests, please contact:
Meihui Bodane, Assistant Secretary for Policy, Research and Strategy
NC Department of Commerce, Labor & Economic Analysis Division (LEAD)