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

    TORONTO, Aug. 18 /CNW/ - It is far too early to call an end to the U.S.
housing downturn, according to the latest Real Estate Trends released today 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."

    Realigning homebuilding to long-term fundamentals

    According to the report, with the steep cutbacks in U.S. homebuilding
over the past two years, the national rate of U.S. housing starts is now
running well below long-term household formation requirements.
    "We estimate the underlying replacement level of U.S. housing starts to
be around 1.7 million annual units, based on average annual household
formation of about 1.5 million," said Ms. Warren. "A period of underbuilding
is necessary to pare down the massive oversupply of housing that resulted in
part from years of overbuilding."
    The report also finds that the realignment in residential construction
toward sustainable levels is just beginning in Canada. Between 2001 and 2006,
Canadian housing starts averaged 222,000 annualized units, well above
underlying household formation of 175,000. This overbuilding has continued in
2007 and the first half of 2008. A widening gap between new construction and
household formation is evident across all provinces, and has contributed to
the gradual rise in unsold new homes in recent years.
    "Canadian homebuilding has cooled since the spring, but overall starts
continue to outstrip sustainable long-term demand. Assuming average annual
household formation of 180,000, underlying replacement demand is about 190,000
new housing units per year," added Ms. Warren. "This implies a 10 to 15 per
cent reduction in nationwide starts from current levels, more so if demand
softens more substantially over the next few years due to reduced
affordability, a slowing economy or tighter credit conditions."

    Scotia Economics provides clients with in-depth research into the factors
shaping the outlook for Canada and the global economy, including macroeconomic
developments, currency and capital market trends, commodity and industry
performance, as well as monetary, fiscal and public policy issues.

For further information:

For further information: Adrienne Warren, Scotia Economics, (416)
866-4315,; Paula Cufre, Scotiabank Public
Affairs, (416) 933-1093,

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