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US Housing Has Bottomed
So says Bill McBride, author of Calculated Risk. In my opinion, his blog is the single best source for information on the US housing market. I’ve followed his blog for years, and can’t think of a single time he’s been wrong.
First there are two bottoms for housing. The first is for new home sales, housing starts and residential investment. The second bottom is for prices. Sometimes these bottoms can happen years apart.
For the economy and jobs, the bottom for housing starts and new home sales is more important than the bottom for prices. However individual homeowners and potential home buyers are naturally more interested in prices. So when we discuss a “bottom” for housing, we need to be clear on what we mean.
For new home sales and housing starts, it appears the bottom is in, and I expect an increase in both starts and sales in 2012.
And it now appears we can look for the bottom in prices. My guess is that nominal house prices, using the national repeat sales indexes and not seasonally adjusted, will bottom in March 2012.
There are several reasons I think that house prices are close to a bottom. First prices are close to normal looking at the price-to-rent ratio and real prices. Second the large decline in listed inventory means less downward pressure on house prices, and third, I think that several policy initiatives will lessen the pressure from distressed sales (the probable mortgage settlement, the HARP refinance program, and more).
Of course these are national price indexes and there will be significant variability across the country. Areas with a large backlog of distressed properties – especially some states with a judicial foreclosure process – will probably see further price declines.
And this doesn’t mean prices will increase significantly any time soon. Usually towards the end of a housing bust, nominal prices mostly move sideways for a few years, and real prices (adjusted for inflation) could even decline for another 2 or 3 years.
But most homeowners and home buyers focus on nominal prices and there is reasonable chance that the bottom is here.
The Insane Price of Canadian Real Estate
With all the information Canadians have heard about the US housing bubble and the incredible economic damage it’s bursting has caused, it’s hard to believe they would follow the same path – and yet they have. The average price of a Canadian home currently stands at $362,899 – about 70% more than in the US.
(Note: Canadian realtors typically report average prices while American realtors report median prices. Average home prices in the US are about 20-25% higher than median prices. The current median US price is $169,500 making the average US home approximately $210,000.)
According to a recent article in The Economist, Canadian house prices are 29% overvalued relative to household incomes and a staggering 71% overvalued relative to rents.
Things are even worse in Vancouver, where the latest Demographia Housing Affordability Survey ranks Vancouver the 2nd least affordable city in the English speaking world. According to the survey, the median price of a home in Seattle was $321,500 while in Vancouver it was $602,000. In the year since that survey was published, Vancouver prices have gone up another 7.8% while Seattle has gone down 7.1% – making a home in Vancouver more than twice as expensive as a comparable home in Seattle. This is in light of the fact the two cities are similar in almost every way – including incomes.
How did things get so out of whack? Same way as they did in the US – with a debt fueled housing bubble. Lesson not learned.
How will the situation resolve itself? In all likelihood the correction will also follow the path of the US – a multi-year housing crash which ruins the lives of countless Canadians and takes down much of the economy with it.
North American Economics 