For U.S. housing, a new collapse

Tim Shufelt, Financial Post
Bordered to the west by idyllic Gulf of Mexico beaches and to the east by the natural bounty of the Everglades, upscale Naples is one of Florida’s premier retirement destinations.
Naples’ charms made it an epicentre for the Florida property boom, where unfettered speculation and limitless credit lifted property values to the stratosphere.
Five years ago, the housing market in Naples was pegged as the country’s most overvalued, with single-family homes estimated to cost 85% more than they should. Now, one in three of those homes sits vacant, a testament to how deep the housing crisis runs in the United States and a signal that a recovery in real estate may not be in reach after all.
“I can’t see anything positive is going to happen with housing for at least a year to a year and a half,” said Jack McCabe, a housing analyst with McCabe Research & Consulting in Deerfield Beach, Fla. “Even at that point, we may just hit the bottom and bounce along it for a while.”
Just as some positive indicators in the United States sparked speculation the economic recovery is taking root, home sales and prices plummeted last month, according to data released Wednesday by the U.S. Census Bureau.
New home sales in February fell 17% to an annualized rate of 250,000 units, the slowest pace of sales activity since the agency began tracking figures in 1963. The median sale price fell 13.9% from the previous month to $202,100, the lowest value since December 2003.
The numbers surprised all but the most pessimistic analysts.
“It’s certainly a lot messier than people had hoped for,” said Brian Bethune, chief U.S. financial economist with IHS Global Insight. It’s also creating a big drag on economic growth, one that could renew last year’s worries over a possible double-dip recession.
But these kinds of setbacks are typical of economies recovering from severe recession, Mr. Bethune said. The economy took everybody on a similar ride last year.
The early stages of 2010 also witnessed a surge in upbeat sentiment, he explained. “Then it unwound, very quickly. In the space of three or four months, the tone of the economy changed dramatically. We went into the pause mode. Now, we’re kind of doing the same thing.”
Recessionary symptoms are likely to resurface in traumatized economies, he said, making it dangerous to extrapolate signs of recovery too far into the future.
It’s possible that financial institutions in the United States did just that.
Early this year, a sense that the housing market had bottomed out and was in the midst of a gradual stabilization prompted a rise in mortgage rates. “Sure enough, banks jumped the gun,” Mr. Bethune said.
The higher rates, combined with more stringent borrowing standards and external economic shocks affecting consumer sentiment, struck directly at housing demand, already fragile and anemic.
Meanwhile, what little buying activity there was focussed on the resale of existing homes, still at bargain basement prices in the most distressed American markets.
New home construction has already fallen close to its “irreducible minimum,” the amount required to replace demolished units so that net supply remains flat, Mr. Bethune said. Home construction currently sits at an annualized pace of about 450,000 houses, one million short of normal levels.
“That’s one million units that have been taken off the market,” he said. Clearly, the foreclosure process, by which vacant and repossessed homes are resold, has yet to exhaust itself.
There are still about 1.5 million vacant homes in Florida, Mr. McCabe said. “Right now, distressed properties are dominating the marketplaces around America.”
And the so-called “shadow supply” of future foreclosed homes still looms, with almost half of Florida mortgage holders facing a property value that falls short of what they owe.
“A lot of people may be carried out feet first before the house is worth what they paid for it.” Many of the properties are even selling for less than what it cost to build them, Mr. McCabe explained.
As long as unemployment remains elevated in the United States, demand will be insufficient to get the market back on its feet, he said.
“Unless you increase demand, you’re not going to fill up these vacant units and get them off the market.”

Canadians confident about home ownership: RBC

Canadians are not only confident that they are assiduously paying down their mortgages, but they also believe they have the means necessary to weather a drop in house prices, contrary to worries that household debt is out of control, a poll showed on Wednesday.

Almost three-quarters of Canadians, or 73 per cent, believe that they or their families are well-positioned in the event of tumbling home prices, according to the annual RBC Homeownership Study undertaken by Royal Bank of Canada .
Will the money last? The poll found that 85 per cent of respondents feel that they are doing a good or excellent job of paying down their mortgage, while 90 per cent of Canadians are confident that real estate in Canada is a good investment.
“There’s been a lot of noise around debt-to-income ratios,” said Marcia Moffat, RBC head of home equity financing, noting that she found it comforting that such a large segment of Canadians said they were able to handle what is typically the biggest purchase of an individual’s life.
She said confidence was drawn from stable employment and rising incomes.
The survey was released a week after the Bank of Canada left its benchmark interest rate unchanged at a low 1 per cent.

The central bank and other policymakers have flagged personal debt as a danger to the economy, although the Bank of Canada last week said household debt was less of a concern than it has been in past months. Consumer spending remains strong but is easing to levels more in line with incomes, the bank said.
Worries about personal debt have twice prompted the government to introduce stricter mortgage rules to prevent overheating in the housing market.
The survey showed that Canadians, supported by a strong banking system, still have a strong interest in purchasing a home over the next two years. Interest declined slightly in the quarter, but remains high overall with 29 per cent saying it’s likely they will buy.
That was down two points from 2010 but is higher than any other year since 2006, the report said. Compared with last year, however, fewer Canadians said it was better to buy now than wait.
Rising home prices were the No. 1 concern about purchasing a home followed by rising mortgage rates, the poll showed.
The poll found that 40 per cent of Canadians feel the current housing market is balanced equally between buyers and sellers, a rise of five points over 2010.

The survey of 2,103 people is considered accurate to within plus or minus 2.2 percentage points, 19 times out of 20.