A mixed message

In a kind of message of Christmas cheer, it appears that the housing sector in the United States is turning out some encouraging numbers.

One has to hope that this trend will continue and that it augurs well for the North American economy. Unfortunately, the outlook in Canada is far less hopeful.

In the western section of the U.S. house prices are just about half of their peak selling price. There was a “short sale” forced on the owner to avoid foreclosure. After a complete renovation, houses there are rented for about $1,000 a month, nearly half of what the original owner had been paying for a mortgage.

This situation is part of the reason to believe the long-suffering housing market at last may have turned the corner. These purchases started to shrink the huge oversupply of vacant, foreclosed homes. As a result the stock of new homes for sale is at an all-time low.

In addition to that good news in the revived construction sector, starts at latest reports were the best in four years, higher by 10 per cent in the year. It is not surprising then that the shares of companies that build homes have been performing very well.

These signals are a welcome change. Housing historically is one of the most powerful engines in the early stages of a business recovery. Purchases of homes increases spending on furniture, carpets and gardening. Previously, the slump in the housing sector had the reverse effect, curtailing all kinds of consumer spending. Still, even now as a share of GDP, it is only half of the average of the past three decades.

This upturn is different from the previous boom. Then private and public lenders, certain that house prices would never decline, loaned funds to prospective buyers on terms that too often were unsustainable.  Home ownership rose significantly.

Nevertheless, the number of homes in foreclosure continues to be too high. Lenders have remained super-cautious , shell shocked by their  previous experience.

High unemployment remains a negative factor inhibiting further recovery. Also, changes in demography, the peak in the home-buying years, baby boomers, will be a long-term drag. Yet the attractive yields available in the resurgence in rents is a sustaining factor.

In Canada houses represent 70% of household wealth, compared to 40% south of the border. House prices continue to be uncorrected in Canada. This is particularly true in some isolated cases such as Vancouver and Toronto.

A decline in our housing sector is a distinct probability – more than in the U.S. Yet overall, the housing industry now offers a glimpse of a better future.



Bruce Whitestone