Prospects are sunny for the Wilmington area housing market despite a few gray clouds and headwinds, industry observers told an audience of about 250 at the 2022 Annual Housing & Construction Forecast Thursday morning. The event, presented by the Wilmington-Cape Fear Home Builders Association and Cape Fear Realtors at the Hotel Ballast, featured a panel of three economists.
 
The sunny news is based on growth in the area’s population and average income, which continue to drive demand for housing. The first economist to speak, University of North Carolina Wilmington faculty member Mouhcine Guettabi, said that more than 20% of the area’s residents now earn more than $100,000 annually. And the number of people who work from home – 11% of the population in 2019 – has grown even more since the pandemic.
 
“This tells us quite a bit about the people who are moving to the area and the incomes of those people,” Guettabi (at right) said, adding that the growing population will increase the demand for housing and services.
 
Unlike most metro areas across the country, Wilmington actually has more jobs now than it did pre-pandemic: a 1% increase, Guettabi continued, and the Wilmington MSA – defined as New Hanover and Pender counties – is the second-fastest-growing metropolitan area in the state.
 
“This is the epitome of a healthy labor market, although not all sectors’ recovery has been smooth,” he said. “Wilmington has outperformed the state, and North Carolina is doing better than many other places.”
 
The gray clouds come in the form of a housing deficit, rising construction costs for new housing and the resulting decline in affordability, said Robert Dietz, chief economist for the National Association of Home Builders (NAHB) (shown at left). He predicted the combination of higher interest rates and uncertainties caused by the war in Ukraine would trim the GDP to perhaps 3.3% in 2022.
 
“Macro risks are rising,” he continued, citing a current 7.9% inflation rate and the risk of a recession should the Fed’s attempt to cool inflation fail to do so.
 
“It’s not just commodity prices that will affect inflation; it’s labor costs as you have more than 11 million open jobs in the U.S. economy and people can demand higher wages,” he said.
 
Dietz predicted that the Federal Open Market Committee (FOMC) will raise interest rates by 0.25% five times during 2022. “Mortgage interest rates will go above 4% this year,” he said. “Another thing the Fed is going to do is reduce their balance sheet: treasury bonds, mortgage-backed securities. They need to sell those off, boosting long-term interest rates. My hope is that they are going to go slowly; it will harm the housing industry if they move too quickly.”
 
Dietz spoke about his concerns among what he terms the “Five L’s” of the home construction industry: labor, lots (the cost of purchasing and developing land), laws, lending and lumber.
 
“Lumber prices have essentially tripled since April of 2020,” he said. “Material costs are up 22% year-over-year. We are not producing enough of these materials here, and there are still tariffs on Canadian lumber: we want to get those down to zero. All other materials are in short supply – they are more expensive and they are taking more time to arrive. This is the number- one challenge in residential construction.
 
“The impact of higher oil prices is going to be greater than we expect,” Dietz added. “It feeds into the cost of transport and of resins, which are petroleum-based and which are in many construction products.”

Dietz emphasized the need to fix supply chains and bring more production of construction materials back to the U.S.
 
As to labor, Dietz said the U.S. is short almost 340,000 construction workers; about 20,000 in North Carolina alone. “We have to recruit, train and retain those workers,” he said, adding that wages for construction workers are now about 8% higher than they were this time last year.
 
Government regulations affecting single-family housing are “immense,” according to Dietz. “Finding ways to reduce the regulatory burden is key in a higher-inflation, higher-interest-rate environment,” he said, putting the cost of following regulations in North Carolina at $94,000  per single-family home.
 
There was sun but a few headwinds in Lawrence Yun’s forecast for the Wilmington area housing industry. Yun, (at right) chief economist for the National Association of Realtors (NAR), echoed Guettabi’s upbeat news about Wilmington’s economy and housing demand, but reflected Dietz’s concern that higher oil prices will stick around until and unless drilling increases to pump more crude into the global market as a counter to the Russian oil boycott.
 
“We all care about green [building], but there is a transition period,” Yun said. “In that period, we need gas and oil. As Realtors, you drive around more than the general population, so you will be hurt more.”
 
On the bright side, Yun mentioned real estate as a great hedge against inflation – both in the single-family and multi-family markets. And, he said, home sales in 2021 were the best since 2006. But while the rate of homeownership for whites has held firm and the rate for Asian Americans and Pacific Islanders is rising slightly, homeownership rates for Blacks and Hispanics have decreased. 
 
“We need to boost homeownership rates for all ethnic communities,” he said. “And with [predicted] mortgage rates of 4%-4.5% by year's end, many first-time buyers will get squeezed out.”