One of the key positives for Canada in this recession has been the vast difference between home real estate markets here versus in the United States. In Canada, new home construction began to decline only in the fall of last year, after the stock market collapsed, credit dried up and net job losses began. In the United States, housing starts have been on a path downward for three years, beginning in early 2006. But the residential market is not all about starts. It is highly dependent on existing-home resale markets as well and this report looks at some of the key measure in both countries.
One of the key positives for Canada in this recession has been the vast difference between home real estate markets here versus in the United States. For the construction industry, it is housing starts that are most important. In Canada, new home construction began to decline only in the fall of last year, after the stock market collapsed, credit dried up and net job losses began. In the United States, housing starts have been on a path downward for three years, beginning in early 2006. They now stand 80% below their peak, but they have been fairly stable at their current low level throughout this year.
New Housing Starts versus the Existing Homes Market
However, the residential market is not all about starts. Furthermore, it is highly dependent on existing-home resale markets, both in terms of volume and price. Existing home sales are often an advance indicator for housing starts, since many families are looking to move up in accommodation or move on to a new development. Prices are a proxy for the demand-supply balance and they also play a crucial role in the overall economy in several other ways. They help to determine consumer confidence, since swings in the value of our homes make us feel more or less wealthy. Also, home equity has been used by many consumers to finance other purchases, including cars and renovation projects.
In the country to our south where the sub-prime mortgage crisis originated, the housing market is still depressed, although some encouraging signs are emerging. There are several measures of existing home prices in the United States. Case Shiller is probably the most widely quoted because analysts like its methodology best. It is more consistent in measuring price changes for similar homes over time. It is less biased by up-market or down-market shifts, depending on what is transpiring in terms of buyer sentiment.
The year-over-year declines for the Case Shiller index are becoming a little less negative. Nevertheless, the price adjustment still stands at -18% for both the ten-city and 20-city composites. Nationally, U.S. existing home prices are back to their mid-2003 levels.
In some of the largest U.S. cities that are comparable to Toronto, Montréal and Vancouver in terms of having diverse economies and a good head office presence, the price drops are more moderate than the national average. Included here would be New York (-12.5%) and Atlanta (-14.8%), with Chicago (-18.7%) right at the national rate.
The sharpest price declines have come in cities burned by earlier speculative fever, the South and West’s Phoenix (-35.3%), Miami (-27.3%) and Las Vegas (-32.2%) and California’s San Francisco (-28.0%) and Los Angeles (-21.3%). Also among the hardest-hit is Detroit (-25.4%), for obvious reasons having to do with auto sector layoffs.
National Association of Realtors (NAR)
The National Association of Realtors (NAR) also has figures on sales volumes in dollars and units in the existing home market. According to the NAR, existing home sales have started to exhibit an upward trend. May was the second month in a row in which existing home sales increased, leading to the first back-to-back gain since September 2005.
The NAR’s measure of average existing-home sales prices is down 16.8% from a year ago, but this figure is being distorted by the oversized presence of distressed homes in the total. Nevertheless, the foreclosed homes market declined from 45% of sales in May to 33% in June. There is other improving news for the U.S. home market from the NAR.
The NAR’s index of pending home sales increased for the fourth straight month. Two factors have particularly contributed to the gains: (1) improving affordability, with prices down and mortgage rates still ultra-low versus what they have been in the past, although starting to move gradually upward; and (2) the $8,000 first-time homebuyer tax credit.
Improved affordability is one thing. Reduced access to credit and uncertain employment are two other factors working against it. Improper and inaccurate home valuations are causing many existing home sales to be delayed and credit denied. Lenders are said to be using appraisers who may not be familiar with the local area or who are comparing traditional homes with the low prices available for “fire-sale” homes. This is a problem that will be worked out in time, but it is slowing the housing recovery in the interim.
Canadian Real Estate Association (CREA)
Now contrast the foregoing with the situation in Canada. The most commonly quoted figures in Canada come from the Canadian Real Estate Association (CREA). On a seasonally adjusted unit basis, Canadian home resales soared by nearly one-third (+31.5%) in the second quarter of this year versus the first quarter. This was a record. Furthermore, dramatic increases were evident across the country, including several cities in western Canada (e.g., Vancouver and Calgary) that have been in particular slumps.
In the individual month of June, actual home resales in units were almost on a par with the all-time record for June, which occurred in 2007. Unit resales in June 2009 were the fourth highest for any month on record. The average existing home sales price ($318,696) in the second quarter of 2009 was the highest ever, up 0.5% versus the previous record set in second-quarter 2008. CREA states that some caution has to be taken in interpreting the average sales price since a disproportionate number of expensive homes are being sold in some regions. But the indicators are generally quite positive for Canada’s resales.
A further indication of how hot the resales market is in Canada is the 4.2-months inventory level (i.e., the number of months that it would take to sell listed properties at current sales rates). The peak level was 12.8 months just a short time ago in January.
Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.