News Update

The U.S. Housing Slump Has Yet To Hit Bottom, According to Scotia Economics

It is far too early to call an end to the U.S. housing downturn, according to the latest Real Estate Trends released by Scotia Economics.

    The report notes that there have been a number of encouraging signs in recent weeks that the two-and-a-half-year slide in U.S. housing activity may finally be coming to an end. While combined new and existing home sales in June fell to a fresh cycle low of 5.4 million annualized units, and are now down roughly 35 per cent from their late 2005 peak, the rate of decline has moderated since the spring. A few regions are even reporting a modest pickup in sales. The pace of home price decline has likewise slowed.

    "However, the potential for a meaningful turnaround in home sales is limited when soaring gas prices and mounting job losses are severely straining household finances," said Adrienne Warren, Senior Economist, Scotia Economics. "Real wages have been falling on a year-over-year basis since last November, and consumer confidence is hovering around a 16-year low."

    The report suggests that the recent rise in long-term mortgage rates alongside increasingly restrictive lending conditions will also keep many potential buyers on the sidelines. Meanwhile, a massive over-supply of unsold homes will keep downward pressure on both prices and construction. The outstanding inventory of existing homes for sale stood at 4.5 million units in June, or 11 months' supply at the current sales pace. There were an additional 426,000 new single-family homes for sale, or 10 months' supply. A supply of around 6 months is considered balanced.

    "A number of fundamental valuation measures, including the ratio of home prices to household incomes and home prices to rents, suggest average U.S. housing prices are moving back in line with long-term trends," added Ms. Warren. "The improvement in affordability will eventually underpin a revival in demand. In the meantime, a continuing yawning supply imbalance, a weakening U.S. job market and tight lending conditions point to a prolonged period of housing market lethargy, with the risk of still lower home prices and construction, and relatively depressed sales volumes."

    The report notes that in contrast to the United States, there is still scant evidence of a significant supply overhang in Canada. The inventory of completed but unsold new homes, while edging higher across most major markets, remains relatively low from a historical perspective, both for single-detached and multi-family developments.

    The volume of homes for sale in Canada's resale market has also been moving up, and combined with softer demand, has lifted the national ratio of new listings to sales from an average of 1.6 in 2007 to 2.0 in June.

     "This shift from the strong sellers market of recent years to essentially balanced conditions points to a cooling off period in which home prices should rise in line with general inflation," said Ms. Warren. "There are significant regional differences, however, with new-listings-to-sales ratios in several of Canada's previously hottest markets like Saskatoon, Calgary and Vancouver now favouring home buyers, with greater inherent downside price risk."