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
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."