Every realtor with whom I've discussed this argues that since Raleigh did not experience a substantial increase in housing prices between 2000 and today, any decrease in housing prices will be relatively small. Wrong!
Areas like Washington, DC, Los Angeles, CA, and Long Island, NY, all of which experienced large price increases and subsequent decreases in housing prices, have growth controls preventing builders from expanding inventory sufficient to meet the increased demand. Whether it's limited open space or zoning restrictions that limit new development, housing inventory could not keep pace with the rapid increase in demand. This caused housing prices to increase substantially between 2000 and 2007. When demand declined in 2007, more rapidly than it rose the previous eight years, prices fell precipitously.
In areas like Raleigh, where open space is plentiful and the opportunity cost of land is relatively inexpensive, builders responded to the increase in demand by building and building and building. After demand fell significantly . . . well, prices did not fall that much, at least yet. But it's coming.
Housing inventory, especially new homes, has increased significantly over the past two years in the Raleigh area and continues to do so. Prices have a long way to fall to eliminate this excess inventory. For those familiar with their microeconomic supply and demand models, DC, LA, and NY all have very inelastic supply curve while in Raleigh it's very elastic.
Exacerbating the problem is that a large part of the increase in demand experienced in the Raleigh market over the previous six or seven years was driven by people relocating here from the DC metro, LA, and NY city areas, among others, all areas that experienced large housing price increases between 2000 and 2007. These people purchased small homes in those areas for, say, $250k in 1998 and then sold them in 2005 for, say, $600k. Flush with cash from the sale of these homes, they came to Raleigh and demanded big homes. Builders here responded by building big.
Now that the bubble has popped and people are no longer moving here with that kind of cash, demand for these big homes stopped, yet builders continued to build. The oversupply is heavily concentrated in the $500k+ market. The cascading effect is soon to come as builders begin unloading these larger and more expensive homes.
After this happens, housing prices will be pushed further downward at all price points, throwing more homeowners underwater and subsequently into foreclosure. This will drive housing prices down even further.
Update: Edited for clarity.
Comments