ECONOMICS BULLETIN
NUMBER 1 I AUGUST 2008
Housing, Exports, and North Carolina’s Economy
Karl W. Smith
Introduction
From 2000 to 2006, the average value of a home in the United States rose by 89 percent.*1 During
this period, the overall economy grew by 16.4 percent.2 Yet the prosperity of the time was not shared
evenly across the country. In particular, manufacturing-heavy states continued to see erosion in
jobs. Textiles, one of the mainstays of the North Carolina economy, shed 63 percent of jobs nation¬
wide and 70 percent of jobs in the state during that period.3
In 2007 and 2008, the housing boom began to lose steam. By June 2008, the median home price
had fallen more than 18 percent from its peak and homeowner equity had fallen to the lowest point
since 1945. Yet at the same time, U.S. export growth accelerated.
The opposing fates of the housing markets and exporting industries are not a coincidence.
Finance and international trade are linked through the exchange rate markets. This article will
explain how the housing bubble began, how the bubble affected U.S. exporting industries, and how
the collapse of the bubble will affect North Carolina.
Origins of the Housing Bubble
The roots of the housing bubble lie in the aftermath of the dot-com bubble. During the late 1990s,
investment in information technology accelerated at an unprecedented pace. Stock market valuations
of companies tied to information technology were far larger than those for traditional companies
with equal profits and growth rates. By the year 2000, however, both stock market valuations and
investment in information technology began to revert to levels common to most industries.
Economists at the U.S. Federal Reserve (the Fed) feared that the collapse of the dot-com economy
might lead to a recession in the United States. The Federal Reserve is the agency charged with regu¬
lating the banking sector and, indirectly, the U.S. economy. Among the Fed’s powers is the ability to
determine the interest rate that banks charge each other for overnight loans, known as the fed funds
rate.
Karl W. Smith is Assistant Professor of Economics and Government at the School of Government
1. Case-Shiller Index, available at www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_cs
mahp/0,0,0,0,0,0,0,0,0,l,3,0,0,0,0,0.html (last visited July 9, 2008).
2. Federal Reserve GDP data, available at research.stlouisfed.org/fred2/data/GDPCA.txt (last visited July 9,
2008).
3. BLS Employment Data, available at www.bls.goy/oes/oes_dl. htm (last visited July 9, 2008).