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The U.S. economy and housing market are caught in a vicious circle, where the uncertainty in either further weakens the other. (David Zalubowski/AP/David Zalubowski/AP)
The U.S. economy and housing market are caught in a vicious circle, where the uncertainty in either further weakens the other. (David Zalubowski/AP/David Zalubowski/AP)

U.S. economy

Why U.S. housing is weak, and why Canadians care Add to ...

A moribund housing market is dragging on an already weak U.S. economy, and causing ripples across the border here in Canada.

This week, two key numbers will likely show that U.S. housing is still an incredibly weak spot, with no significant improvements in sight. On Monday new home sales figures are expected to show a fourth consecutive fall in transactions in August, to an annualized number of around 295,000, not far from the low of 278,000 set in August, 2010.

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On Tuesday, the S&P Case-Shiller index will give an indication of how strong home prices are across major centres in the U.S. – and that’s not likely to be a pretty sight either. House prices have bounced up and down in recent months, but they are dramatically lower than 2006 highs, languishing at roughly the levels of 2003.

The weak housing market is partly a hangover from an era of overbuilding and buying driven by low interest rates, which was followed by a price collapse and mass foreclosures.

But it is also a function of a struggling economy. With unemployment so high, fewer people can afford to buy homes, even at discounted prices. And with the value of existing homes dropping, many people feel poorer and cut back their spending – thus dampening any economy recovery.

“The housing market is weak because the economy is weak [but]the economy is weak because the housing market is weak,” said Paul Dales, senior U.S. economist at Capital Economics, which projects no sustained home price increases in the United States until 2014 at the earliest.

Consumers are particularly uneasy about the longer-term outlook, said Peter Buchanan, senior economist at CIBC World Markets. “If you are concerned about how much you are going to be making six months down the road, or whether you are going to have a job, that is going to make you particularly unlikely to make a longer-term commitment [such as]purchasing a house.”

Even some recent housing numbers that look positive – existing home sales showed a 7.7-per-cent jump in August – also have a negative hue. A huge proportion of those sales, 31 per cent, represents distressed properties that were sold at a discount.

The weakness in the U.S. housing market has both direct and indirect impact on Canada’s economy, said Peter Hall, chief economist at Export Development Canada, because so many of our exports are linked to the amount of building that goes on south of the border.

While the lumber industry is hit the hardest, the depressed U.S. housing market will affect a broad range of Canadian exporters, Mr. Hall said. “You need base metals to build a house, you need a lot of wood, you need asphalt shingles. These are things that Canada supplies raw materials for.”

Canadian companies also make goods that feed into supply chains for higher-value products, such as appliances, fixtures, carpeting and flooring, he added. “The housing market permeates many different sections of the economy.”

Mr. Hall points out that the U.S. housing market has been in distress now for years, since the low-rate excesses and overbuilding became apparent around 2006. Far too many houses were built in the early years of the decade, when rising prices created the illusion that housing was a great investments. The crash, when it came, helped fuel the 2008 recession.

Unfortunately there is no sign of any short-term recovery in the housing market. Mr. Hall projects a real turnaround won’t come for at least another year. “The U.S. economy, broadly speaking, is not going to get back on its feet until the housing market is in better shape,” he said. “Housing is always a leading indicator of economic activity.”

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