Today we’ll be looking at the existing homes market rather than new housing starts. The importance of the latter for the overall economy is easy to grasp because it accounts for construction jobs. But the larger resale market – i.e., more existing homes are sold each year than new homes – also plays a key role on several levels.
Today we’ll be looking at the existing homes market rather than new housing starts.
The importance of the latter for the overall economy is easy to grasp because it accounts for construction jobs.
But the larger resale market – i.e., more existing homes are sold each year than new homes – also plays a key role on several levels.
For starters, the performance of existing home prices can have a major impact on individual and family confidence levels, which then spills over into consumer spending.
Resale activity also provides a great deal of employment, especially among real estate agents and in the legal profession.
And let’s not gloss over another key feature of resale housing activity, the work provided to home renovators. This may arise out of a desire to fix up one’s home before putting it on the market. Also, on the other side of the sales agreement, purchasers often make alterations soon after moving into their new properties.
When it comes to a comparison of resale markets between the U.S. and Canada, there are basically two criteria - the base level of activity and the direction of change.
With respect to the former, Canada comes out the clear winner. The Canadian real estate market encountered a short period of decline during the recession. Since then, however, it has mainly trended upwards and prices have generally been rising or flat.
The U.S. market has gained notoriety for its devastating level of foreclosures. These have caused home prices to drop precipitously (i.e., by approximately one-third, peak to present) and many properties have stood empty for long periods of time.
As for the direction of change, however, the more positive results may now be happening south of the border. The U.S. has been experiencing strong employment growth over the past six months while in Canada, only a handful of new jobs have been created since last summer.
U.S. families, by way of their pension and mutual fund holdings, are also receiving a boost from a surge in stock prices. The Dow Jones industrial average recently crossed 13,000 for the first time since May 2008. Anything to lift the confidence of householders is good news for residential sales.
By the way, the composition of the gainers on Wall Street is interesting. Some of the big name firms to record large equity-value gains over the past several years have been IBM, Caterpillar Inc., Home Depot Inc., McDonald’s Corp. and Coca-Cola Co. Oil sector firms and financials have fallen off the pace.
Home Depot, which has close ties to the home remodeling market, recently reported fourth quarter earnings that exceeded analysts’ expectations.
At this point in time, sales of U.S. existing homes are trending slightly upwards, while in Canada they have flattened out. The figures on existing home sales south of the border are compiled by the National Association of Realtors (NAR).
According to the NAR, sales of existing homes (i.e., singles, townhomes, condos and co-ops) in January were +4.3% compared to December. But they were only +0.7% versus what is being called a “spike” in January of 2010.
The median (i.e., half lower and half higher) existing-home sales price across all types of properties was $154,700 U.S. dollars in January, down 2.0% from the same month in 2010.
Distressed homes (i.e., foreclosures and short sales) accounted for 35% of all transactions in the month, about the same percentage as in January 2010. Such properties sell at greatly reduced prices, dragging down the overall results.
The tone of the NAR’s press release is more upbeat than the raw numbers might suggest. One always has to be cautious about pronouncements coming from real estate associations. Under the direst of circumstances, they can usually find a way to talk up the market. It’s in their DNA.
What the NAR is saying does makes a lot of sense, though. The factors driving a better sales trend focus on affordability such as record low mortgage rates and bargain home prices. Other motivators, such as rising rental rates and more household formations, arise out of the better jobs picture (e.g., young people finding employment and moving out of a relative’s basement).
The current fixed, conventional 30-year mortgage rate in the U.S., at 3.92%, is a record low in data going back to 1971, according to Freddie Mac. The comparable figure in January 2010 was 4.76%.
The most impressive number in the NAR report is the inventory of unsold listed properties. It’s down 20.6% from a year ago. There is a 6.1 months’ supply of available resale properties at the current sales pace. This is approaching the point where supply and demand are in good balance.
According to the Canadian Real Estate Association (CREA), existing home sales in this country in January 2012 declined 4.5% versus December 2011. That left them just about even with sales levels in January averaged over the past five and ten years.
National average resale home prices in January were +1.2% year over year. In only four of the 16 cities featured on CREA’s overview map, did home prices decline: Victoria (-6.5%); Saint John (-6.2%); Calgary (-3.1%) and Vancouver (-1.3%).
No wonder there is still talk about a bubble in home prices on the West Coast. Vancouver average resale home prices ($752,380 Canadian) were still more than 50% higher than the city in second place, Toronto ($463,534). Victoria ($454,905) has fallen back into third position.
The three cities with the strongest year-over-year price increases were Regina (+9.5%), Toronto (+8.5%) and Ottawa (+6.0%). Results are available only for the whole province of Newfoundland, but they are worth noting at +16.4%. Also, it warrants recording that the territories are seeing some impressive price gains, with the Yukon at +26.7% and Yellowknife, +32.3%.
Finally, New Brunswick should be your relocation destination if cheap housing is what you’re seeking. Both Saint John and Fredericton (below $200,000) have average resale home prices that are less than one-fifth what is to be found in Vancouver.
That brings us around to a few final words on the Vancouver residential marketplace.
CREA warns Canadians to be careful reacting to the year-over-year price changes in the first half of this year. They may stay flat, or even cross over into negative territory, due to an anomaly in the data.
In the first six months of last year, the results for Vancouver were seriously distorted in an upwards direction by a high number of sales in a couple of exceptionally pricey neighborhoods.
In other words, last year’s base level was bumped up by circumstances that aren’t likely to be repeated this year.
Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.