Charlotte Metro Housing Market Supply Analysis

[atlrvr]

I had a discussion yesterday with someone who has closely tracked the Case-Schiller index, and the concensus is that Charlotte is only slightly overpriced compared to its historical average and in much better conditions than many markets (Florida and California) that despite their huge drops, are still very much above their historical pricing.

That said, people still aren't buying, so I decided to investigate my other primary concern for the national housing market....oversupply. Home builiding reached historical levels in the mid 2000's, with 2004 and 2006 the 1st and 2nd, respectively, highest years ever for new residential building permits. My concern is that the vast supply of product will prolong the period of no construction activity, which is currently a major drag on the economy.

To analyze this, I looked at the household population change since 1981 as well as residential building permits (new construction) for the same time period. Logic would indicate that the number of new homes should not exceed the number of new households by a large margin for each year. The number of new home permits should be slightly higher to account for 2nd homes, replacement of obsolete homes (tear downs, conversion to commercial use, etc.) and the fact that not all permits result in a finished house.

To determine what the proper ratio of permits to households is, I looked at a 20 year period 1981-2001, which allowed for a large enough span to include several economic cycles, but not be skewed by the huge boom of the mid-2000's. Nationally, the ratio came out to 1.28, which is to say, 28% more homes are built annually (on average) than their are households to consume them.

At the state level, the ratio was slightly higher at 1.36, and in the Charlotte MSA, higher still at 1.43. These higher ratios I suspect are the result of developers aggressively building to account for higher than average population growth.

Here is tables looking at the nation, NC, and the Charlotte MSA (which was manually adjusted to account for changes in the MSA boundaries).

[monsoon]

It sounds as if you begin by talking about housing in Charlotte, but you give statistics that are from the MSA which is over 3000 sq/miles. I am having difficultly trying to understand the point you are trying to make.

[atlrvr]

To analyze this, I compared the recent housing boom (2001-2007) to the last housing bubble in the 1980's. What I found is that between 2001 and year end 2007, there were 58% more building permits than household growth, and assuming 26% (20 year average) was a sustainable, then the nation is overbuilt by almost 2.3 million houses. Based on the household growth that occurred in 2007, there is a 2.1 year oversupply of homes above what is considered sustainable assuming no more houses were built after 2007. Comparing this to the 1980's bubble, there was an oversupply of 3.4 million homes, or a 3.7 year supply if no new houses had been built after 1989.

So...the first bit of good news, we are less overbuilt now than we were in 1989. Of course we continue to build homes even though there is an oversupply, just as we did after 1989. It took 8 years for the level of building to return to "average" then, so considering we were 50% more overbuilt in the 80's than we are now, we should expect 5 years (2008 is year 1) before returning to normal levels of residential construction. I will note that population growth rate was accelerating in 1990, and remaning flat now, so I did temper my esitmates slightly due to this.

The news gets better for North Carolina. There is currently a 77k home oversupply in NC, which represents a 1.1 year oversupply. This indicate North Carolina could return to normal levels of activity in 2-3 more years so by late 2010 or early 2011.

The amazing thing is the Charlotte MSA. There is actually a negative supply of homes as a derivitative for what has been average over the 1981-2001 period. This constitutes a NEGATIVE one year supply of homes over average, assuming the metro growth occurs at the same record pace (in absoulte numbers) as 2007. I think its reasonable to expect growth to slow, as it did in the early 1990's, but none the less the area should be well positioned.

The table I posted above illustrates all of this, hopefully clearly, and it is obvious from the numbers that Charlotte never overbuilt compared to its household growth to the same degree as the state or nation. In fact, Charlotte has been well below its historical ratio of permits to households since 2005, while NC didn't correct until 2007, and the nation didn't correct until this year (based on my preliminary evalution of 2008 numbers which I didn't post because they aren't final).

Anyway, I just wanted to post some good news that actually shocked me. It seems that Charlotte should be well positioned for residential growth once consumer confidence and lending standards return to normal levels. The same can't be said for Nevada and similar states.

[atlrvr]

It sounds as if you begin by talking about housing in Charlotte, but you give statistics that are from the MSA which is over 3000 sq/miles. I am having difficultly trying to understand the point you are trying to make.

[southslider]

Even if it were reported for just the City of Charlotte, I think there would still be flaws. That's because the vast majority of permits have been for conventional suburban single-family product. There is a reason in-town areas have appreciated much more than the greater city, let alone region. It's because Charlotte has very limited supply of urban housing product. So if in this economy, the paradigm shift hastens, Charlotte may only mirror the rest of the nation outside of Route 4. Granted, transplants coming from overpriced markets may have inflated some of the in-town market, but it helps that there isn't much supply to meet the strongest segment of demand.

Just compare these two maps...

Mecklenburg County Values:

http://www.trulia.com/home_prices/North_Ca...ounty-heat_map/

Mecklenburg County Appreciation:

http://enterprise.star-telegram.com/ARCIms...lt/2008/sv2.asp

Put the two together, and Charlotte may ride out this mess by having strong stock not just in traditional South Charlotte and Lake Norman, but now its reborn inner-ring of limited urban neighborhoods as well. I worry more about the exurbia at the edges and largely outside city limits. Who knows when those areas may recover, since these areas do have excess supply of Anywhere, USA conventional product.

[monsoon]

Please don't allow this discussion which is backed by substantial data to be subverted by semantics. The table and all analytical discussion clearly identify the geographies as nation, state, and MSA.

[atlrvr]

My analysis takes into account all housing stock, (rental, condo, single-family). This should negate the affects of affordability as variable.

[boilerdown]

atlrvr,

Wow talk about a cold audience! This is great work, very interesting digest of solid data. I don't see any other way of analyzing a comparison between markets other than using the MSA definitions for the Charlotte market to compare to other MSA markets with any kind of objectivity. Besides, much of this growth wasn't necessarily in Charlotte proper (e.g. Union County, Cabarrus county, and York and Lancaster in SC).

[MZT]

Prices speak for themselves. Empty houses become rentals or distress sales. If rents are stable and prices flat, we're in a better position to resume increases later.

Charlotte does have some historical precedent for being early out of the gate. Very little housing was built here in the 1930's but demand began creeping up during WWII (instead of after it).

[Charlotte_native]

Prices speak for themselves. Empty houses become rentals or distress sales. If rents are stable and prices flat, we're in a better position to resume increases later.

[monsoon]

Well, I always say the proof is in the pudding. If one takes those numbers to heart, then we should be seeing booming sales here. Instead the place is cratering and faster than the the local press is willing to admit. People can't buy homes when they don't have the money to support it and layoffs this past month, announced yesterday, are the worst they have been since 1974. We are seeing a basic change in what people can afford and while I have no doubt we will have more construction in the future, the days where people are able to spend $400/sq ft on a shack in this town are gone.

So if one does believe their eyes, which many don't seem to in this city, then one has to conclude there is more to it than just the conclusions that can be drawn from that chart. I say that if you believe it, go out and buy some investment property. It's a buyers market right now. If you believe it you will hit a goldmine next year. Let us know how that works out.

[atlrvr]

This chart only plays a small component into pricing. If there is no demand, it doesn't matter what the supply is. The chart was made with no particular agenda in mind, except to satisfy my own curiousity. The statement that I made is that the construction industry is severly depressed and that is a large drain on the economy.

This chart isn't predicting when people will start buying again, rather than once they do, it indicates that the Charlotte metro should recover faster than the rest of the nation due to the current undersupply compared to its historical average. In turn, there should me demand for new housing construction here before elsewhere in the country, which should boost the construction industy.

No one has a crystal ball, so to help predict, I prefer to rely on examining historical trends and empirical data.

Put a different way, I think it's better that Charlotte has a negative new housing factor supply rathan a positive one such as the state and nation.

I am curious as to what other factors are creating a drag on local housing, but that is better served by a poll, as its is likely a qualitative analysis rather than a quantitative one.

[palmetto75]

Good analysis! I think it proves that relative to most of the nation we are in good shape. The problem is the word "relative".

I'll stay clear of the demand/supply debate for the general mkt. There are some measures such as $7500 tax credit and the proposed 4.5% mortgage that will help the local mkt out tremendously since we still (given the influx of new relocations to the area) have afforable housing and have several first time buyers in the lower to mid range of the mkt that are ready to buy once the incentives outweigh the risk. That being said the upper end ($800K-$1.5 mill) of the mkt looks increasing weak. After holding up well for long time this traunch of the mkt is in somewhat of a freefall, and I would certainly equate it to oversupply. We all all see The Park as Charlotte's lasting monument to the boom's excess, but if you look around the areas you will see several half built McMansions where the builder has walked away or been forced away midproject. In just a quick tour through Southpark, Cotswald and Myers Park I counted over 20 such properties.

[rockhilljames]

I, for one, am actually happy to see a depression in newer construction. Maybe this would give the city and surrounding metros time to create new building standards so we can eliminate the shoddy construction and poor land-use that the construction boom was causing.

[Charlotte_native]

Well, I always say the proof is in the pudding. If one takes those numbers to heart, then we should be seeing booming sales here. Instead the place is cratering and faster than the the local press is willing to admit. People can't buy homes when they don't have the money to support it and layoffs this past month, announced yesterday, are the worst they have been since 1974. We are seeing a basic change in what people can afford and while I have no doubt we will have more construction in the future, the days where people are able to spend $400/sq ft on a shack in this town are gone.

So if one does believe their eyes, which many don't seem to in this city, then one has to conclude there is more to it than just the conclusions that can be drawn from that chart. I say that if you believe it, go out and buy some investment property. It's a buyers market right now. If you believe it you will hit a goldmine next year. Let us know how that works out.

[monsoon]

.....

From what I read of Atlrvrs comments, the comments of others, and various other reports locally and nationally, we aren't hurting as bad as many other regions and might come out of this sooner. I've not seen any predictions is what 'sooner' will mean relative to other areas and the other key component is we aren't 'as bad' as other areas. That still leaves open that we are in a mess just like everyone else......

[Charlotte_native]

I am sure this is the opinion of people living in the center of Charlotte. But the numbers published were for the MSA. Lets forget the 8000 foreclosures that had hit the city by just August, and look at the MSA. There are places like Kannapolis, Lancaster (Ok not in the MSA), southern York county, Lincoln county, etc where 1000s have been laid off just recently. Most likely these jobs are not coming back. I have a friend that works in a clinic in Union county and people there are making decisions to eat vs paying for heat vs paying for a prescription. Yes, this is probably an alien thought to the center city, as to say "we aren't hurting" isn't based in reality.

[boilerdown]

Prices have fallen in the last 6 months downtown driven by fears of job losses and reduced availability of credit but to call the market "cratering" seems like a stretch. I like your advice though, I think now, or to be more precise after the Wachovia and BofA layoffs become official, would be a great time to buy downtown. $400/sf is also a stretch for uptown unless you're talking about some ultra luxury units in The Vue. Other projects, including residential high rises go for much less than this and they are certainly not substandard housing.

[Charlotte_native]

$400/sf is also a stretch for uptown

[Conformity]

^^^^

Well, I always say the proof is in the pudding. If one takes those numbers to heart, then we should be seeing booming sales here. Instead the place is cratering and faster than the the local press is willing to admit. People can't buy homes when they don't have the money to support it and layoffs this past month, announced yesterday, are the worst they have been since 1974. We are seeing a basic change in what people can afford and while I have no doubt we will have more construction in the future, the days where people are able to spend $400/sq ft on a shack in this town are gone.

So if one does believe their eyes, which many don't seem to in this city, then one has to conclude there is more to it than just the conclusions that can be drawn from that chart. I say that if you believe it, go out and buy some investment property. It's a buyers market right now. If you believe it you will hit a goldmine next year. Let us know how that works out.

[voyager12]

This anecdote may be tangential but the economy is so interconnected I think it's relevant. I went to Brixx on East last night for takeout and I thought they were closed. The parking lot was empty. This was during the usual rush time. The manager said that it's been slow for awhile but this past month the bottom just dropped out and they have been dead. He thinks people are just scared of the unknown and are pulling back, so this fear hits restaurants hard.

It probably got somewhat busier as the evening wore on but it's clear that many places are suffering. I have not pulled back in spending because I don't spend much to begin with and just have to take care of myself. Pretty low maintenance here

Anyhow, seems to me that until a sustainable degree of confidence returns to the average consumer on things as mundane as dinners out, being able to pay the utilities, and confidence in a stimulus plan, there won't be big uptick in the housing market anytime soon.

If the much vaunted and admired Obama economic "dream team" comes up with a coherent path back to economic health I think we will rebound slowly in another year or so. We were one last metros to slow down because the bubble here was relatively smaller than many other cities, so we should be one the first ones to rebound.

[monsoon]

^^^^

.......

If you must impugn the chart, wouldn't you want to do so within the confines of what the chart claims to offer. .....

[monsoon]

..... I have not pulled back in spending because I don't spend much to begin with and just have to take care of myself. Pretty low maintenance here ......

[Charlotte_native]

For the rest, it's come as a rude shock. As for me, I am waiting for them to build the boat docks so I can ride my boat through the city of Charlotte. The river, de-Nial, is getting deeper and longer every day and the views must be interesting by now.

[monsoon]

^I don't know. I think a lot of people are angry about what is happening. I am not angry however as I knew this was coming.

You only have to check my posts here from years back where I questioned the priorities and construction and taking place in this city in that it was unsustainable. This was often met with derision. I was told, you are wrong, Charlotte is great, this is a younger generation that knows better, etc etc. Now that it has happened and yet we still have those that think the turn around is coming in just a few months, I see nothing wrong about repeating the position that I have always had on UrbanPlanet. I have yet to see any steps being taking that might address these issues as there is still ongoing topics in this forum where people actually believe the Wachovia tower condo tower is still going to go up.

If you interpret that as gleefulness on my part that housing and the economy is bad I am not going to try and tell you otherwise because if that is all you have ever gotten from my posts on UrbanPlanet, then nothing I can say here will convince you otherwise. I will add however that I am greatly saddened that this is happening and what it is doing to people that I know outside this forum. People that have been laid off, people who are worried for their children, elderly people who have seen their plans and promised retirement benefits disappear. That kind of stuff does make me angry. So if my posts here do something to expose what I think are the real roots of these problems, then I don't see any problems bringing them up. We have that going on yet executives at Wachovia get millions for destroying a bank and I won't even get into the billion dollars the city has spent on professional sports. You are more than free to disagree with my opinion or put me on ignore if you just can't take it.