Author: Maggie Smith
Introduction
The North Carolina housing market has experienced remarkable transformations over the past two decades. Using data from the Federal Housing Finance Agency (FHFA) Home Price Index and the Zillow Observed Renter Index, this analysis explores how home prices and rents have evolved in North Carolina compared to national trends and examines underlying factors like housing supply and mortgage rates.
Home Price Trends
North Carolina's home price appreciation has generally followed national trends (Figure 1). The 2008 housing crisis negatively impacted both markets, though the decline in home prices appeared somewhat delayed locally. From 2012 to 2019, North Carolina experienced moderate annual growth in home prices, typically ranging between 2% and 6%.
However, in 2021, year-over-year home price appreciation surged to 15% and reached a peak of 22% in 2022, surpassing the national average of approximately 17%. Looking back to 1980, this marks the highest period of appreciation. Growth moderated in 2023 and 2024, suggesting a potential return to more sustainable growth rates.
Figure 1
Housing Supply Constraints
The national housing inventory reached its highest point around 2007 with approximately 4 million available units, comprising both existing homes and new construction (Figure 2). Following the 2008 crisis, housing supply contracted significantly and has never fully recovered to pre-crisis levels, remaining around 2 million units through 2019.
In 2020, the COVID-19 pandemic brought additional challenges, including supply chain disruptions, labor shortages, and rising construction costs which further restricted new housing construction. Additionally, the supply of existing homes on the market declined in 2020, which may be related to seller hesitancy early in the pandemic, followed by a surge in demand partly driven by historically low mortgage rates (as discussed below). By 2021, total housing inventory dropped below 1.3 million units, reaching historically low levels. A lack of housing supply has been a factor in the sharp rise in housing costs.
Figure 2
Mortgage Rates Influence Demand
Mortgage rates have experienced notable fluctuations over the past two decades as well (Figure 3). Rates consistently declined from 2000, hitting historic lows of around 3.0% in 2020-2021 due to the Federal Reserve's efforts to stabilize the economy during the pandemic. Although the Federal Reserve does not directly set mortgage rates, the Fed’s monetary policy decisions impact the financial markets, which influence mortgage rates. Low rates during this period increased purchasing power, contributing to heightened housing demand and rapid price increases.
Starting in 2022, mortgage rates began rising sharply, reaching approximately 6.8% by 2023. This increase was driven by the Federal Reserve's policy shifts aimed at controlling inflation. Higher mortgage rates subsequently dampened housing demand, contributing to the recent moderation in home price growth.
Figure 3
Similar Dynamics in the Rental Market
Rental prices have mirrored the broader housing market trends (Figure 4), showing modest and relatively stable annual growth of around 3%-5% from 2016 to 2019. Growth accelerated notably in 2021 and peaked at 14% in 2022 for the average North Carolina metro area, above the national average of around 12%.
By 2024, rental market growth rates returned to approximately 3%, aligning again with historical patterns and national trends. This suggests that the rental market, like home prices, experienced a pronounced response to the temporary economic shifts brought about by the pandemic and subsequent policy measures.
Figure 4
Conclusion
North Carolina's housing market has experienced considerable shifts driven by a combination of constrained housing supply, fluctuating mortgage rates, and evolving rental dynamics. Historically low mortgage rates and reduced housing inventory led to unprecedented price growth in recent years. As rates rose sharply, price growth rates moderated in both homeownership and rental markets. While current trends indicate a potential return to equilibrium, a depleted supply of homes and elevated prices continue to influence affordability, availability, and overall market stability across the state.