Guest editorial: Growth increasing housing costs

Published 12:43 pm Tuesday, January 16, 2024

By Mike Walden

NCSU

Although the inflation rate leveled off in 2023, according to polls, it is still a big issue. Just to remind you, when it is said the inflation rate is down, this doesn’t mean the average price level is falling. Instead, it means most prices are still rising, just at a slower pace. Indeed, the Federal Reserve’s goal is not to cause prices to fall, but instead to have the average price level increase at about 2% annually.

Generally, the numbers we see in the  news about inflation are measuring the inflation rate for the country. In today’s column, I want to bring the inflation rate closer to home by discussing two topics related to prices.

One: What is the cost-of-living in North Carolina compared to the nation? When analyzing the same living standard in North Carolina to other states as well as to the nation, is the cost-of-living lower or higher? That is, if consumers purchase the same type and quantity of products and services, is the total cost higher or lower in North Carolina than elsewhere?

The second topic  addresses how the cost of that market basket of products and services has recently changed in North Carolina relative to the nation. This is simply a more elaborate way of asking how the inflation rate in North Carolina compares to the national inflation rate.

There’s good news for the comparative cost-of-living in North Carolina. Data from the federal government for 2022 – the latest available – show the cost of the same products and services bought by a typical household was 5.8% lower in North Carolina compared to the nation.  Among the 50 states and the District of Columbia , North Carolina had the 23rd lowest cost of living. Washington, D.C., California and Hawaii were the most expensive states, while Alabama, Mississippi and Arkansas were the least costly.

Two expenditure items are driving North Carolina’s relatively lower cost-of-living. The first is the cost of housing, which is 18% lower than the national cost. A big reason is that the percentage of North Carolinians living in rural regions of the state is more than twice as high as in the nation. The cost of housing is typically much lower in rural areas than in cities due to lower population densities and less expensive land. When more people are competing for housing and land in urban areas, land  and housing costs rise.

Government data show the second factor helping North Carolina have a more moderate cost-of-living is education services, which are 10% under the national average. A major cause is the relatively low tuition and fee costs of North Carolina’s public universities compared to similar institutions in other states.

However, the good news for North Carolina’s relative cost of living has been better. In 2005, the first year the federal government published the state cost-of-living data, North Carolina’s cost-of-living was 11% lower than the national average. This is a discount almost twice as great as in 2022. Hence, although living in North Carolina is still a relative bargain, the bargain is not as great as it used to be.

What happened? There’s an easy answer – growth. During the last two decades North Carolina has been one of the fastest growing states in the nation. North Carolina’s population and economy have expanded, driving up the cost of real estate. More people and businesses competing for the same amount of land inevitably pushes up land and structure costs. This is one of the downsides of a growing state.

Now on to the second topic – how North Carolina’s recent inflation rate compares to the national inflation rate. Using the most recent data for 2021 and 2022 and measuring the annual inflation rate from December 2021 to December 2022, the national rate was 6.5%. For the same time period, North Carolina’s inflation rate came in just a little over 6.5%.

Hence, the news on both topics – North Carolina’s relative cost-of-living and relative inflation rate – can be read as positive. But will it remain this way?

A big reason why it may not is the forecast for North Carolina’s population. North Carolina’s 2023 population was estimated at 10.8 million. The forecast for 2050 is 14 million, a 30% increase. In contrast, the nation’s population is expected to increase 15% – half the North Carolina rate – from 2023 to 2050.

While more people in the state is good for many reasons – greater business opportunities, expanded innovation, more workers, increased variety and enhanced national prominence – one negative could be increased costs, particularly for housing. This could cause North Carolina’s below-average cost-of-living to gradually disappear and its annual inflation rate to exceed the nation’s. Consequently, as North Carolina grows, strategies for reducing the adverse impacts on living costs, such as directing more growth to lower-cost rural areas, will become more important.

There are many wonderful reasons for living and working in North Carolina, with one being a lower cost-of-living.

But how long will our lower living costs last, and what can be done to prolong this advantage?

You decide.

Mike Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.