Exporters Beware - The Outlook According to Housing is Gloomy

The following article, by Peter Hall of Export Development Canada, is excerpted from “Canadian Transportation & Logistics”

Housing markets have once again proven their economic prowess. U.S. housing starts fell sharply in mid-2006, fully 18 months ahead of the softening in the broader U.S. economy – a remarkable lead on an economic slowdown that most agree is now going global. So given its foresight, is this keen sage saying anything about impending recovery?

Initially, the plunge in U.S. housing starts was not so bad. From just over 2 million units in 2005, starts fell to the 1.5 million-unit level in late 2006.

That’s a big tumble, but it marked a return to long-term trend levels – an unusually stable outcome…. But the tumble resumed in mid-2007, and by the end of the year had sunk to 1 million units. No sign of a rebound here.

There is some solace in this quick plunge. It stands to reason that the sharper the correction, the quicker the recovery. True, but U.S. housing markets became steadily more bloated in the 2002-06 period. Starts exceeded the population’s basic requirement for new housing by roughly 1.4 million units in five short years. Working this off could easily take another 18 months, even at the current slow pace of building activity...

Other housing activity measures are even less comforting…. As such, the U.S. market now has over 10 months’ supply of houses on the market, a far cry from the stable level of 4.5 months’ supply, last seen in late 2005. Again, not a happy result.

Calculated another way, this is equivalent to over 7 million surplus units on the market – a year’s worth of sales, and in a good year, no less. Given this situation, it is no wonder that the U.S. market is facing the first nationwide decline in housing prices in recent memory.

What is more, there is no clear indication that the U.S. housing market has hit bottom. U.S. consumers were lured into sub-prime mortgages with temporary ‘teaser’ interest rates which upon expiry were reset to higher levels. For the market as a whole, the peak of these resets occurs in the first quarter of this year – suggesting strongly that further fallout is likely.

The implications are gloomy. U.S. consumers are accustomed to using home equity as a ready source of cash. With the housing market in a funk and prices swooning, this pool of liquidity is fast drying up. Other sources of savings – equity markets and bank accounts – have also been found wanting, so the consumer’s only option appears to be curtailed spending, not a pleasant prospect for the world economy. Closer to home, the message for Canadian exporters – particularly of wood products, who face an 11% decline in activity this year alone – is sobering.

The bottom line? The numbers suggest it will be at least mid-2009 before U.S. housing markets begin a meaningful rebound. If this indicator is right yet again, 2008 and 2009 will see slower global growth. Let’s just hope that in the recovery cycle, this sage is not quite so forward-looking.