housing construction, local economic activity

David A. Penn

English

Research Papers in Economics

T
his special issue of Midstate Economic Indicators exam-
ines the housing construction situation for the Nashville
area compared with other metropolitan areas and the United
States. In the 13-county Nashville MSA, single-family
home construction has slowed considerably, falling 12 per-
cent in the first quarter 2007 compared with the first quarter
2006. Construction activity peaked in the fourth quarter
2005, trending lower to the present quarter (Figure 1). 
Since the end of the 2001 recession, we have become
accustomed to significant over-the-year gains in housing
construction in the Nashville area, so much so that the cur-
rent decline seems unexpected and perhaps a bit scary. In
perspective, however, the current lull in housing construc-
tion should be considered a correction due to oversupply,
not a catastrophe. Comparing with other nearby metropoli-
tan areas for the first quarter of 2007, the correction in the
Nashville area is moderate. As Figure 2 shows, construc-
tion is down much more in Atlanta (-32.3 percent), Jack-
sonville (-51.6 percent), Indianapolis (-37.4 percent), and
Memphis (-20.8 percent) and about the same in Charlotte
(-12.4 percent). Raleigh experienced a more modest 7.8
percent decline. Housing construction for the U.S. fell 30
percent during this period and is down 21 percent on aver-
age across Tennessee. So, if you are a local builder it’s fine
to wish for the good old days, but you should also thank
your lucky stars that you’re not doing business in Atlanta,
Jacksonville, or Indianapolis.
Housing construction has slowed much more in some
metro counties than others. Rutherford County and
MEI
HOUSING CONSTRUCTION
CURRENT STATUS
by David A. Penn
Volume 16.5 Special Issue 2007

MIDSTATE 
ECONOMIC 
INDICATORS
Business and Economic Research Center  ￿ Jennings A. Jones College of Business  ￿ Middle Tennessee State University
continued inside
Figure 1. Single-Family Building Permits, Nashville MSA
Figure 2. Change in Single-Family Building Permits, 2006–2007, First Quarter
2007 2006 2005 2004 2003 2002 2001 2000
-60% -50% -40% -30% -20% -10% 0% 10% 20% 30%
1,300
1,100
900
700
500
U.S.
Nashville
Memphis
Raleigh
Jacksonville
Indianapolis
Charlotte
Atlanta
Actual Smoothed
1,500
Source: Census Bureau
Source: Census Bureau
-30.7%
-11.9%
-51.6%
-37.4%
-20.8%
-7.8%
-12.4%
-32.3%2001 2002 2003 2004 2005 2006 Annual Average Growth Rate 2001–06
Population in housing 1,216,905  1,234,863  1,252,324  1,275,212  1,384,347  1,417,441  3.1%
Total housing units 522,820  533,830  544,806  558,751  611,143  630,000  3.8%
Occupied housing units 487,182  483,557  497,490  511,781  566,146  586,880  3.8%
Average household size 2.50  2.55  2.52  2.49  2.45  2.42 
Vacant housing units 35,638  50,273  47,316  46,970  44,997  43,119  3.9%
Vacancy rate 6.8% 9.4% 8.7% 8.4% 7.4% 6.8%
Source: American Community Survey and BERC estimates (2006)
Table 2. Housing Units and Population in Housing Units for the Nashville MSA
County   City/Place 2005Q1 2005Q2 2005Q3  2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 % Change 06Q1–07Q1
Bedford Shelbyville 45 56 30  38  72  50 24  52  18  -75.0%
Davidson Nashville 964 1,032  942  936  910  1,236  916  1,025  973  6.9%
Maury Columbia 35 35 43  46  45  59 50  46  43  -4.4%
Spring Hill  325  361  311  462  297  415  303  264  288  -3.0%
Unincorporated 80 61 89  66  90  90 71  68  75  -16.7%
Total Maury County 440  457  443  574  432  564  424  378  406  -6.0%
Montgomery Clarksville 375 482 319  198  265  416 409  347  306  15.5%
Unincorporated 100 140 125  96  99  174  92  112  100  1.0%
Total Montgomery County 475  622  444  294  364  590  501  459  406  11.5%
Robertson Springfield 31 34 34  26  60  47 50  34  36  -40.0%
White House 34  51  44  34  50  31  64  33  42  -16.0%
Unincorporated 35 60 61  42  43  61 63  49  46  7.0%
Total Robertson County 100  145  139  102  153  139  177  116  124  -19.0%
Rutherford La Vergne 157  181  143  113  192  149  110  98  148  -22.9%
Murfreesboro 423 408 536  426  534  439 368  269  383  -28.3%
Smyrna 155  145  119  94  141  145  119  157  93  -34.0%
Unincorporated 279 305 271  210  227  288 207  154  225  -0.9%
Total Rutherford County 1,014  1,039  1,069  843  1,094  1,021  804  678  849  -22.4%
Sumner Gallatin 60 141  68  101  79  82 223  123 63  -20.3%
Hendersonville 116 169 138  142  139  142 116 82  113  -18.7%
Portland 44 51 42  35  47  35 29  30  32  -31.9%
Unincorporated 116 154 162  125  136  136 136  128  131  -3.7%
Total Sumner County 336  515  410  403  401  395  504  363  339  -15.5%
Williamson Brentwood 81 87 91  79 116  101 70  29  57  -50.9%
Fairview 28 29 29  27  31  19 18  16  17  -45.2%
Franklin 235 241 145  208  202  219 158 58  125  -38.1%
Thompson’s Station 1  -    5  27  8  4  21  10  12  50.0%
Unincorporated 110 121 114  86  98  126  90 75 74  -24.5%
Total Williamson County 455  478  384  427  455  469  357  188  285  -37.4%
Wilson Lebanon 102 68 38  41  27  56 28  56  93  244.4%
Mount Juliet 116  105  133  127  114  105  104  100  138  21.1%
Unincorporated 136 161 188  139  173  145 144  121  123  -28.9%
Total Wilson County 354  334  359  307  314  306  276  277  354  12.7%
Source: Census Bureau
Williamson County experienced the largest year-to-year
decline in single-family permits, with Rutherford down
22.4 percent and Williamson 37.4 percent. Sumner County
and Wilson County experienced more modest declines.
Remarkably, construction activity in Davidson County
actually rose by 6.9 percent (Table 1).
It may be useful to briefly recount the factors that con-
tributed to the 2002–2005 housing construction boom in
the Nashville MSA. The boom can be attributed to a num-
ber of factors; perhaps most important are population
growth, smaller household size, and falling mortgage rates.
Population in occupied housing grew an average of 3.1 per-
cent from 2001 to 2006, but the number of occupied hous-
ing units rose at a 3.8 percent annual clip (Table 2). How is
this possible? The size of the average household is shrink-
ing. Average household size was 2.5 persons in 2001, rising
to 2.55 in 2002, then falling every subsequent year to 2.42
1
in 2006. Granted, the difference between 2.50 and 2.42 is
not much, but consider this: nearly one in five new housing
units between 2001 and 2006 for the Nashville MSA can be
attributed to shrinking household size.
2
Second, an important factor in the demand for new
houses is the cost of renting a house or an apartment com-
pared with home ownership. When rents rise relative to
home-owning costs, the demand for owner-occupied homes
will increase. Figure 3 shows median rental costs and
home-owning costs for the Nashville MSA as a percent of
income for 2001 and 2005; rents have increased, but home-
owning costs have not, causing home-ownership to be more
attractive for qualified homeowners. Incentives for house-
holds to shift from renting to owning a home diminished
beginning in 2005 as the mortgage rate, although still near
HOUSING CONSTRUCTION
continued from front 
Table 1. Building Permits for Single-Family Homes2000 2001 2002 2003 2004 2005 2006 2007
14%
12%
10%
8%
6%
4%
2%
0%
35
30
25
20
15
10
5
0
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
2000 2001 2002 2003 2004 2005 2006 2007 2001 2005
Figure 3. Median Rent and Homeowner Cost as % of Income* Figure 4. Thirty-Year Fixed Mortgage Rate (%)
Figure 5. Year-over-Year Growth of Existing Home Prices, Nashville MSA and the United States
*Nashville MSA
25.3
19.3
28.9
19.9
16%
Source: Census Bureau, American Community Survey
Source: Office of Federal Housing Enterprise Oversight (OFHEO)
Source: St. Louis Federal Reserve Bank
a 35-year low, began to climb. We may surmise that much
of the decline in demand for new homes in 2006 and 2007
could be attributed to the rising mortgage rate.
The third factor is the mortgage rate. The rate for a 30-
year conventional mortgage averaged 6.26 percent in May
2007, up from a recent low of 5.92 percent for 2005 (Fig-
ure 4). Though mortgage rates are more likely to climb
than to fall in the short term, the current rate still is very
low by historical terms, the lowest (excepting 2004–2005)
since 1966. As foreign investors trim their holdings of
long-term Treasury bonds, market forces are putting
upward pressure on the mortgage rate, forcing prices down
and yields up. Higher growth and interest rates in Europe
and other countries cause foreigners to sell some U.S.
assets, putting upward pressure on interest rates. 
Housing Prices
Housing prices are softening rapidly in some parts of
the U.S. housing market but not so much in the Nashville
MSA (Figure 5). That is to say housing prices are not rising
quite as fast as they have been for the Nashville area. Dur-
ing the peak of the U.S. housing market in 2004–2005,
prices for existing homes were climbing at a 13–14 percent
annual rate. Prices began to cool in the first quarter 2006
and a year later were only 4 percent higher. By contrast, the
Nashville MSA experienced a more gradual rate of price
appreciation beginning in 2004 and peaking in the second
quarter of 2006 at 10 percent. Price growth cooled thereafter
but not drastically; as of the first quarter 2007, home prices
continue to rise in Nashville at a still robust 8.3 percent
pace. Thus, Nashville did not experience the very robust
boom conditions for prices seen in the east and west coasts
and certain other areas in the United States but also has not
experienced the quick unraveling of home prices.
The ability of a household to make mortgage pay-
ments for a home is a critical factor in the demand for
housing. As a financial matter, the home-buying decision
depends on the level of household income, the price of
homes for sale on the market, and the mortgage rate.
Although higher very recently, mortgage rates still are very
low compared with the past 20–30 years. With mortgage
rates relatively stable and low, affordability depends on
housing prices relative to income. Nashville housing prices
have risen somewhat more quickly than median household
income, up 15.7 percent compared with income growth of
13.9 percent from 2001 to 2005. Affordability is not nearly
the concern for Nashville that it is for the U.S. housing
market, where housing prices have been rising nearly three
times more quickly than incomes. Some potential buyers
are priced out of the market when housing prices rise
faster than household income.
How much of the demand for housing arises from
within the metropolitan area and how much is attributable
to new arrivals from out of state is difficult to know with
precision, but Table 3 offers some clues. The table shows
the number of persons who moved to new houses from
2004 to 2005; for the five counties shown, nearly 218,000
persons moved to a different residence in 2005, nearly 20
percent of the total population. Notably, more than one-half
continued on back
Nashville MSA United States 
Median gross rent
Median homeowner costof the demand for housing for Sumner, Williamson, and
Wilson counties arose from other counties within Ten-
nessee, as did 41 percent of housing demand for Rutherford
County. By contrast, demand for housing from in-state
movers amounted to only 16 percent for Davidson County.
In conclusion, the housing market has slowed in the
Nashville area but not as much as in many other markets
in the U.S. Local conditions are likely to gradually
improve beginning late in 2007. 
1. BERC estimate.
2. To determine this, estimate the number of housing units needed
in 2006 assuming household size remains at 2.5, then subtract from the
actual number of occupied housing units. 
Non-Profit
Organization
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Murfreesboro, TN
Change service requested
Business and Economic Research Center
P.O. Box 102
Middle Tennessee State University
Murfreesboro, TN 37132
615-898-2610
MEI is published quarterly by
the Business and Economic
Research Center, Jennings A.
Jones College of Business, 
Middle Tennessee State 
University. MTSU, a Tennessee
Board of Regents University, is
an equal opportunity, non-
racially identifiable, educational
institution that does not dis-
criminate against individuals
with disabilities. AA304-0607
Online: www.mtsu.edu/~berc
Phone: 615-898-2610
E-mail: kkulp@mtsu.edu
Director: David A. Penn
Associate BERC Director: 
Murat Arik
Dean, Jennings A. Jones 
College of Business:
E. James Burton
Publications Editor/Designer:
Sally Ham Govan
HOUSING CONSTRUCTION continued from inside  
Davidson County Rutherford County Sumner County Williamson County Wilson County
Total population 539,213 210,301 141,577 151,003 98,327
Number living in different house a year ago: 106,557 46,174 27,086 23,419 14,627
 in same county 69,701 18,930 4,939 3,559 2,479
 in another Nashville MSA county 14,123 16,169 15,540 10,442 8,164
 in another Tennessee county 2,894 3,017 998 2,757 1,132
 in another state 19,839 8,058 5,609 6,661 2,852
Source: Census Bureau, American Community Survey, 2005
Table 3.  Housing Turnover 2004–2005

Housing Construction: Current Status

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Housing Construction: Current Status

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