This is a post from Alex Carrick's blog that covers the Canadian construction industry.

Since 1985, Mr. Carrick has held the position of Canadian Chief Economist with Reed Construction Data's CanaData, the leading supplier of statistics and forecasting information for the Canadian construction industry.

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Construction Industry Forecasts

Notes from Alex Carrick - Sep 28, 2011

Alex Carrick
Pre-emptive warnings about home equity lines of credit (HELOCs)

The problems for Canada in the months ahead, on account of the world economic slowdown, may flare up most alarmingly in housing markets.

Hopefully the United States won’t serve as the model of what to expect.

Consumer confidence in the U.S. has taken a significant hit of late, further detracting from the outlook for housing demand.

The Conference Board’s consumer confidence index was little changed in September (45.4) from August (45.2). Both months were down substantially from July (59.2).

In February of this year, the consumer confidence index had been as high as 70.4. The base period for the index was 1985 set equal to 100.0.

Sales of new single-family homes in the U.S. dropped from an already distressingly low 302,000 units in July to 295,000 units in August. It was just as well the number of unsold properties also declined, to 162,000 units from 164,000 units the month before.

Therefore, the number-of-months inventory – i.e., total unsold units divided by the latest month’s sales rate – stayed essentially flat, near where it has been throughout this year at about seven months. “Normal” is between four and five months.

The S&P/Case-Shiller resale home price indices showed some slight improvement in July month over month. Both the 10- and 20-city composite indices rose 0.9%.

However, that was on a current-dollar basis and real estate activity is traditionally a little more buoyant in the summer.

On a seasonally-adjusted basis, the month-to-month price changes for both indices were 0.0%.

Comparing July of this year with July of last year, the 10-city composite index was -3.7% and the 20-city composite, -4.1%.

Eighteen of twenty cities were down year over year. The largest drop was in Minneapolis (-9.1%). Phoenix (-8.8%), Portland (-8.4%), Chicago (-6.6%), Seattle (-6.4%) and Tampa (-6.2%) also recorded large declines.

Only two cities yielded existing home price gains, Detroit (+1.2%) and Washington (+0.3%)

Both the 10- and 20-City composite indices now sit at levels comparable to 2003. The drop in average prices nationally versus their pre-recession peaks has been one-third. 

In Canada, home prices continue to experience lift. Statistics Canada’s new home price index was up 2.3% year over year in July and average resale home prices were +7.7% year over year in August, according to the Canadian Real Estate Association (CREA).

The Office of the Superintendent of Financial Institutions (OSFI) has issued a pre-emptive warning to banking authorities and homeowners based to some degree on the U.S. experience.

A so-called “perfect storm” may be brewing comprised of extremely low interest rates, a weakening economy and the temptation lenders will feel to maintain business by aggressively courting borrowers.

These are the ingredients for a potential disaster if unemployment rises and home prices fall.

Canadians typically have more equity in their homes than Americans. That serves as a good buffer in hard times.

Where Canadians may be vulnerable is if they up their home equity loans to pay for personal expenditures under duress. Then the picture could turn ugly if home prices drop.

Home equity lines of credit have the acronym HELOCs.

This latest warning comes on top of measures adopted, in two stages, over the past couple of years by the Department of Finance. The steps taken then were designed to reduce the risk that home purchasers would get in over their heads.

Included at that time were reductions in amortization periods; a requirement for higher down payments; a lowering (from 90% to 85%) in the loan-to-property-value ratio for HELOCs; and tougher scrutiny of credit-worthiness.

Shorter-term mortgage approvals, where monthly payments may be cheaper, have been raised to the same high standards as for often pricier five-year fixed-rate loans.

There is irony in these cautionary messages being delivered to banks and individuals.

After all, is it not the case that the whole purpose of having ultra low interest rates is to encourage borrowing so that consumer spending will help to keep the economy afloat?

Alex Carrick

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.


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Read Other Recent Alex Carrick Posts

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