Recession or stability for Canada

Throughout the Global Financial Crisis, when the world economies slowed down, Canada held onto economic growth. This was due, in large part, to the approach taken by the Bank of Canada and the Government.

It has been a long, slow process for other countries to catch up. While we are starting to see signs of life in our largest trading partner, the U.S., other parts of the world, especially Europe continues to struggle.  Now, however, Canada is feeling the effects of the economic slowdown. It’s true that some sectors, in particular housing, as been impacted by the government rule changes to mortgages and home equity lines of credit. Other sectors such as manufacturing and exports for example, arefeeling the fallout from countries which normally bought goods deal with their own struggling economies

For an economy to function, money needs to keep moving. A quick look at the stats shows an economy growing at its slowest pace since pre-recession 2007. The use of consumer credit has dropped to levels not seen since the 1990s. The pace of retail sales is mediocre at best. Already, it has dropped 1.2 percentage points below the long-term average. Fewer people are accessing their lines of credit. Personal loans remain stable, however, largely due to the demand for auto loans.

We still hear about the rising debt-to-incomes ratios. Yet it is rising at the slowest pace we’ve seen in more than a decade. Interest payments on consumer debt are the lowest since 2009.

Consumers seem to have slowed their spending, for now. It could be the media’s emphasis on household debt, on gaps in retirement savings, on gaps on overall savings, or on the amount of credit card debt. It could be news of lost jobs,or maybe people are just tired of hearing the news.

Credit card growth is soft but maybe that’s a good thing. Insolvencies are falling, slowly, yet falling nonetheless. A sharp rise in the unemployment rate can lead to an increase in insolvencies but that’s not happening either. Yes, there have been job losses but employment increased by 1.6% or 286,000, all in full-time work, year-over-year in 2012.  Over the same period, the total number of hours worked rose 1.7%. In January, employment declined in Ontario and British Columbia. At the same time, there were increases in Alberta, Saskatchewan and New Brunswick.

In economics, a recession is a business cycle contraction, a general slowdown in economic activity. Economic indicators such as GDP, employment, investment spending, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. While we are living in a slow down, we are not seeing high job losses or increases in bankruptcies.

Economic stability refers to an economy that experiences constant growth and low inflation. Our inflation rate is the lowest it’s been in three years. And while the pace of economic growth has slowed, there is still growth.

Recession or stability? We believe stability.

The Return of Substandard Housing

by Kermit Baker
Director, Remodeling
Futures Program

The magnitude of the housing bust that began in the middle of the past decade is well documented, with a 75 percent plunge in housing starts, 45 percent decline in existing home sales, and 30–35 percent slide in house prices. Less well known is how the housing bust and the ensuing cutbacks in residential investment have eroded the condition of existing homes.

Reasons for concern over the potential for underinvestment in the housing stock are numerous, from the aging of the rental stock to the rising share of homeowners with underwater mortgages to the surge in foreclosures and short sales. In fact, there has been a significant decline in spending on homes during the housing bust. Average annual improvement spending by owners declined 28 percent between 2007 and 2011 after adjusting for inflation, totally erasing the run-up in spending during the boom years. Rental units never saw a run-up last decade, so per unit spending was down 23 percent between 2001 and 2011.

Figure 1

Sources: JCHS tabulations  of 2001-07 C-50; 2001-11 AHS; and Estimating National Levels of Home Improvement and Repair Spending by Rental Property Owners by Abbe Will, JCHS Research Note N10-2, October 2010.

There has been surprisingly little concern in policy circles that this significant reduction in housing investment might be producing deterioration in our housing stock. Thanks largely to the success of government housing programs and the increasing affluence of our population, the condition of the housing stock has largely dropped from policy makers’ radar screens in recent decades.

The first Census of housing in 1940 labeled 45.4 percent of owner-occupied units as substandard, which was defined as housing which lacked complete plumbing facilities or was dilapidated. This share dropped sharply over the next several decades, falling all the way to 6.1 percent in 1970 according to Clemmer and Simonson’s analysis in a 1983 article in the AREUEA Journal. Because measures of housing quality were dropped after the 1970 Census due to unreliability of data and the subjective measurement of structural quality, more recent statistics on the number of substandard units are not available from the Census.

However, beginning in the early 1970s, information from the American Housing Survey (AHS) points to the structural condition of the housing stock continuing to show slow but continuous improvement.  As of the 2007 AHS, just 2.27 million owner-occupied homes, or 3.0 percent of the total, were characterized as moderately (with fairly minor structural problems) or severely inadequate (with more major structural problems), down from 3.24 million or 5.1 percent of the total in 1995.

Figure 2

Notes: A housing unit is defined as inadequate through a combination of gross unit attributes such as lacking complete kitchen or bathroom facilities or running water, as well as signs of disrepair such as leaks, holes, cracks, peeling paint, and broken systems. For a complete definition, see the US Department of Housing and Urban Development’s Codebookfor the American Housing Survey, Public Use File: 1997 and Later.  Source: JCHS tabulations of the 1995-2011 AHS.

Since the housing market bust, however, this trend has reversed. By 2011, more than 2.4 million owner-occupied homes were classified as inadequate, an increase of 160,000 from the 2007 AHS. While this increase seems fairly minor in the big picture, the importance of it is not. Given available data, this appears to be the first significant increase in the share of homes with structural problems since the government was able to track them beginning with the 1940 census.

Now that the housing market is recovering and residential investment is increasing, this dip in the quality of the housing stock may well reverse as these homes are improved. However, recent Joint Center analysis concludes that once a downward cycle in housing quality is underway, for many homes it doesn’t get reversed. This analysis focused on owner-occupied homes that were characterized as inadequate in 1997, looking at their experience over the following decade but before the dramatic rise in distressed properties.

According to the 1997 AHS, 4.4 percent of owner-occupied homes were considered inadequate. By 2007, these units accounted for almost 8 percent of homes in this 1997 cohort that were no longer owner-occupied (vacant, or converted to rental or nonresidential uses), suggesting that they were less in demand. Even more telling is that these inadequate units accounted for almost 17 percent of all 1997 owner-occupied homes that were demolished within the decade.

The longer-term fate of the current slightly larger number of inadequate homes is unknown. Many of these homes likely will be renovated to provide affordable housing opportunities. However, many may not recover without extra help. Given the extraordinary circumstances that many homes have gone through in recent years, particularly foreclosed homes that often were vacant and undermaintained for extended periods of time as they worked their way through the foreclosure process, they may be more at risk than their inadequate predecessors. It’s probably time to put the structural condition of the housing stock back on the housing policy agenda.

Mixed messages from media – it’s the norm

Once again, we are getting mixed messages from the media. Headlines warn that house prices are easing, yet on further reading, we find that only a few major centres are feeling the pinch. In local markets, prices have stabilized and even increased slightly.

For example, in Vancouver, prices fell 0.81 per cent in January from December, and were down 2.54 per cent from a year earlier. Prices in Calgary slipped 0.1 per cent on the month, but rose 4.29 per cent on the year. And Toronto saw prices dip 0.37 per cent between December and January, but register a gain of 5.31 per cent from a year earlier.

While prices may be stabilizing, sales are lower than a year earlier. Information from The Canadian Real Estate Association (CREA) showed the number of sales had not changed much month-to-month since September, 2012. That just changed with CREA’s latest report released on February 15 stating that national home sales activity edged up on a month-over-month basis in January 2013.

Yes, the housing market has cooled since January 2012 but signs point to a fairly healthy spring market.
Despite recent media attention to a slowing housing market as well as reporting on job losses, and an underperforming economy, as usual, things are not as bad as they seem.  Really! Let’s first take a look at what’s happening in the U.S.

That country’s export market expanded in the fourth quarter of 2012, which means that factories are increasing their output and products are being sold. This is a good omen for the manufacturing sector there and it points to an increase in trade with other countries.

There are positive signs in the retail sector and in the consumer credit market – people are starting to spend more, albeit it’s slow, but still a good sign. 

While average home prices in the U.S. are still about 30 per cent lower than their 2005 peak, the long road to recovery has begun. Real home prices in the third quarter of 2012 were 5% higher than a year ago.
In Canada, we need to accept the market for what it is – balanced – which, actually means normal. A hot real estate market is not the norm, yet people think that anything less than boom times is doom and gloom.  Hot markets can’t be sustained. It’s great when we’re in it – all sectors benefit – but eventually, the market returns to normal.

According to a report by Benjamin Tal, Deputy Chief Economist for CIBC, the Canadian economy is making sense again. Both the labour market and housing starts, although weaker than what we’ve been experiencing, he says, are in line with what we should be seeing at this point.

The big picture is that the Canadian economy will probably grow by 1.7%-2.0% in 2013 and that’s normal.

Different Data Sources Tell Different Stories About Declining Geographic Mobility

by George Masnick
Fellow

The Census Bureau recently released its usual extensive Current Population Survey (CPS)-based package of tables on geographic mobility for 2011-12.  A new feature of this release is a series of historical charts, one of which is reproduced below. Examining just the last decade, mobility rates took a sharp turn downward in 2007-08, with most of the decline occurring in moves between states (Figure 1).  This sharp decline has been the impetus for many stories about the decline in the geographic mobility rate and its implications for housing (see this example).  Most have assumed that the mobility decline was caused by the Great Recession: with reduced job opportunities across the country, there was less inducement to change residence in search of employment, particularly among young adults who were unable to leave the parental nest. Some have asserted that the loss in housing values and tight mortgage lending have “locked in” owners who otherwise would like to move, especially those owners who are now under water on their mortgages.

Figure 1

Source: U.S. Census Bureau, Current Population Survey, 1948-2012, select years.

Yet some recent efforts to scrutinize mobility rate trends and associations have raised doubts about the basic facts. Research at the Minneapolis Fed suggests Interstate Migration Has Fallen Less Than You Think.  Another series of papers have debated the strength of the association between negative equity and reduced mobility. Findings published in 2010 that owners with negative equity are one-third less mobile were challenged as largely a result of the authors dropping some negative-equity homeowners' moves from the data.   The challenge received a rebuttal that was lukewarm at best.

But a more fundamental question is whether there was indeed as sharp a decline in mobility in the late 2000s as the CPS data in Figure 1 suggests. Since 2006 the Census Bureau’s American Community Survey (ACS) has also provided annual estimates of mobility rates that are consistently higher than those of the CPS and suggest a different trend (Figure 2). One factor contributing to higher ACS rates could be that, starting in 2006, the ACS included in its sample the more mobile institutional population. In contrast, the CPS sample excludes most people that live in group settings such as correctional facilities, military barracks, and college dormitories.  The Census Bureau has recalculated the ACS mobility rate based only on the population living in households for 2006 through 2009.  These modified ACS rates plotted in Figure 2 are significantly lower than those with the group quarters population included, are in line with the long-term more gradual decline in the pre-2000 CPS trend, and definitely do not show as sharp a decline around 2007.

Figure 2

Source: Current Population Survey (CPS) and American Community Survey (ACS) published tables.  The Census Bureau has recalculated the ACS mobility rate based on population living in households for 2006 through 2009 (www.census.gov/prod/2011pubs/p20-565.pdf).  The ACS did not cover the entire U.S. until 2005.

The differences between the ACS and CPS mobility rates in Figure 2 are supported by additional analyses of inter-county and inter-state migration trends from these two sources. This research also shows that the ACS levels and trends are mirrored almost exactly by migration rates from IRS data, further adding credence to the ACS. Mobility rates of household heads calculated from the American Housing Survey (AHS) also closely follow the levels from both the ACS and the IRS data.  The persistently lower rates of mobility in the CPS since 2000 are not well understood, but might be explained by the CPS data being collected primarily by a telephone survey that might not fully reflect the recent growth of cell phone-only households - assuming that those households contain persons that are among the most mobile.  (The ACS is primarily a mail survey, IRS data are from filed tax returns, and the AHS follows the occupants of particular housing units over time.)

If there is a story in the ACS trend, aside from one of gradual decline over the long-term, it is that the period immediately leading up to the Great Recession was one of above-trend mobility.  More people were moving than might have been expected during the peak of the housing boom. IRS migration trends in the analysis cited above support this story as well.  The bursting of the housing bubble has mostly just returned geographic mobility rates to their long-term trend.  The long-term decline in mobility is likely due to a host of broad social, economic, and demographic trends: the aging of the population; delays in the transition to adulthood; the increase in dual-career households; the changing race/Hispanic origin of the population; more working from home; more homogenized employment opportunities across different locations; the increase in long-distance commuting patterns; etc.  Absent another housing boom, we should expect near-term mobility rates to continue to gradually decline.

Watch the Inventory – and the Investors

by Eric Belsky
Managing Director

As housing demand has been coming up, the inventory of homes for sale on the market has been going down.  This tightening of supply relative to demand is the bedrock of the recovery. It gives consumers confidence and a sense of urgency to buy.

Those interested in the course of home prices should watch inventory levels, especially relative to demand.  Multiple listing services (MLS) provide measures of inventories at the metropolitan level and typically even for submarkets within them.  If you start to see inventories in a market climb, the recovery in prices—and demand which is partly linked to the urgency created by rising prices—may not stay on course.

In assessing housing market recovery, then, an important question is what is in store for inventories of homes for sale.  Will demand at some point be outstripped by inventory growth as new home building ramps up again and more existing owners place their homes on the market because of rising prices?

The answer to this question of course will hinge on conditions in individual housing markets.  Broadly speaking, the dynamics will likely differ depending on the share of homeowners in a market who are underwater and the activity of investors in single-family rental properties.

In places where only a small fraction of homeowners are underwater, rebounding homes prices may be enough to spark owner interest in selling their existing homes to trade up or down.  With interest rates so low and the potential to move unfettered by negative net equity, many may start to feel that now is the time to sell.

In places where many owners are deeply underwater, however, even a strong single-digit increase in home prices may not be enough to induce many owners to place their homes on the market.  After all, they would still have to write a check at the closing table if they did. Therefore, one would expect inventories to fall more in places with negative net equity as demand picks up because homeowner interest in selling does not follow suit.

In fact this is precisely what seems to be occurring. Inventories have fallen more sharply and asking prices risen more in areas with more underwater homeowners (click figure to enlarge). 

JCHS tabulations of data from CoreLogic and www.deptofnumbers.com

However, the buyers of these homes are not necessarily individuals looking to move. In many of these places much of the demand has come from investors who snapped up homes at low prices and then rented them out. Figure 2 lists places where there has been a significant shift in the share of single-family homes that are rented. These are the markets where investors have been most active, helping to soak up the excess supply of distressed homes.

Source: JCHS tabulations of US Census Bureau, American Community Survey data.

Moving forward, it is therefore not just what homeowners in these places do that matters but also what investors will do with recently acquired single-family properties they are currently renting out. Many will look for a chance to exit their investments when prices appreciate enough to make it worthwhile.

For investors in distressed markets, the run-up in prices from the trough is pure upside. Many may head for the door at about the same time, especially if they discover that it is both more arduous and costly to manage scattered-site, single-family rentals than they had anticipated.

If enough investors in any of these markets start to head for the door to try to gain from capital appreciation, home price appreciation could slow.  So to predict where prices may be headed, keep your eyes on investors and what they are doing.  Local realtors will see the first signs of activity in homes now rented shifting back to the for-sale market.  Seek them out and find out what they are seeing.