Has yesterday's report of a stronger-than-forecast U.S. economy done anything to ease concerns about the possible demise of the U.S. housing boom? The answer would appear to be "No."
Those economists who worried that the red-hot U.S. housing market is due for at least a slowdown -- if not a correction -- are unshaken even after a report showing that U.S. gross domestic product in the third quarter rose 4.3 per cent, exceeding an earlier estimate of 3.8 per cent. But those who had a rosier view of the housing situation are also sticking to their guns.
Stéfane Marion, assistant chief economist at National Bank Financial, sees nothing in yesterday's report to change his view that the residential sector will sap the U.S. economy of strength in 2006. The fact that new-home sales in the U.S. rose by 13 per cent to a record in October shows there is still a lot of strength, he said. However, he added "we still think that a lot of this demand continues to be driven by markets for second homes or speculation, if you want, because it is out of sync with the normal demographic requirements."
Moreover, he said, "we are a bit more worried when we see the [home] ownership rates starting to edge downward in the U.S. at the same time as the new-home sales are surging to ever higher levels; from our standpoint, that means that you might be in the last phase of this euphoria on the real estate market."
Alex Grassino, economist with Laurentian Bank Securities, also hasn't changed his read on the U.S. housing market. He already sees signs of a slowdown, noting that mortgage applications have, with the exception of the most recent report, been on a definite downward trend for the last eight to 10 weeks in the face of higher interest rates and that the number of months it takes for a house to sell has risen to the highest level in at least a year.
"The market is moderating; whether it is going to burst is another story," Mr. Grassino said. He thinks there could be corrections, "but it won't be a countrywide thing, by any means."
Others are more upbeat. On Tuesday, before the revised GDP numbers came out, BMO Nesbitt Burns released a market comment entitled "the death of U.S. housing has been greatly exaggerated."
Michael Gregory, senior economist with BMO Nesbitt Burns, said of the new home sales figures, that home builders have been pricing more competitively, "which seems to have stoked demand." He thinks U.S. housing activity is still cresting, but adds that "improving labour markets and the recent pullback in mortgage rates could turn this into the slowest of soft landings."
As the comments indicate, recent data on U.S. housing has been inconsistent. New-home sales rose to a record level in October, but sales of existing houses declined in the same month by a steeper-than-expected 2.7 per cent. At the same time, though, the average house price jumped to $277,700 (U.S.) from $265,600.
There are other troubling signs in the U.S. market. Housing affordability is at a 14-year low. The inventory of unsold houses is at its highest level since 1986. Also, demand for the exotic type of mortgages that helped fuel the surge in housing has fallen and delinquency rates are rising, especially in the sub-prime mortgages.
Canadian gross domestic product figures for the third quarter were also released yesterday, showing the Canadian economy grew at a 3.6-per-cent annualized rate in the period, which topped Bank of Canada expectations. This side of the border, there isn't the same concern about housing that there is in the U.S. The Canadian housing market is regarded as healthy. Carl Gomez, Toronto-Dominion Bank economist, said in a report earlier this week that the risk of an emerging housing bubble in most major markets, including Toronto's rapidly growing condo market, "remains extremely low."
