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What's building over the border? Optimism

The stop-and-start recovery has left many investors wary of good news. However, the rebound in the U.S. housing market looks to be not only real, but a potential turning point in the country's slow climb back to normality.

James Marple of TD Economics says in a report published this week that the real estate rebound that gained speed in 2012 "was likely just the beginning of a multi-year rise in the U.S. housing market."

If this proves true, it's welcome news for Canadians, since our exporters stand to gain a great deal from our biggest trading partner's growing appetite for homes.

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Why should we be optimistic? U.S. housing starts in December were up 37 per cent over the same period a year earlier, according to the Census Bureau, while analytics service CoreLogic estimated home prices rose 8.3 per cent in the same period.

The annualized pace of 954,000 housing starts in December, 2012, is nearly double the level in April, 2009, when starts were plugging along at a 478,000-units-a-year clip. At first glance, the surge may seem like a unrealistically large uptick – but if you compare it to historical levels, which once passed 2 million units a year, it's clear there's still plenty of room to rise.

Relative to the history of housing starts, the U.S. has "barely surpassed the trough of previous cycles," Mr. Marple wrote.

Further gains will be fuelled by a brightening economic picture. The recession knocked the wind out of the labour market, making it more difficult for people – especially young people – to form new households. As employment numbers have rebounded, the number of households headed by people between 24 and 34 has also grown, Mr. Marple wrote.

That sets up the country for growth of 1.3 million new households each year. The new households should generate plenty of demand for new homes, especially given how cheap home prices have become. The 32-per-cent price drop after the housing bubble's late-2005 peak brought home prices from historic highs of nearly four times the U.S. median annual income to 2.6 times that value in 2012.

This is "exactly in line with its long-run average," Mr. Marple wrote, and makes homes as affordable as they were between 1979 and 1999. Which makes a pretty good case for optimism.

As always, there will be headwinds, including historically high foreclosure rates and rising student debt among new graduates, the economist wrote.

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But considering the pace of household formation in the U.S., Mr. Marple wrote, new-housing activity is still as much as 30 per cent behind where it could be. That could be up to 40 per cent if you take into account the need to replace decaying housing stock. Anyone need some Canadian lumber?

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About the Author

Josh O’Kane is a reporter with The Globe and Mail's Report on Business. Since joining the paper in 2011, he has told stories from New Brunswick to Nairobi. More


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