Title: Spiking existing home sales signal that recovery may be at hand

Sub-title: However other indicators leave the precise timing of a turnaround open to question.

 

Last month, the Bank of Canada made a de facto prediction that the Canadian economy would bounce back and down positive growth this quarter. Just when that tipping point would be hit, the central bank left open. But one group that isn’t waiting is resale housing buyers. Existing home sales rose by 2.5 percent in seasonally adjusted terms during July, marking a sixth consecutive monthly gain. According to the Canadian Real Estate Association, sales via its Multiple Listing Service increased by a stunning 18.2 percent compared to last year at this time.

 

“Since the beginning of the year, no other Canadian economic indicator has rebounded so sharply as existing home sales,” said Pascal Gauthier, an economist at TD Bank Financial Group in a Friday report to clients. Gauthier isn’t kidding. Those increases represent great news for homeowners, who have seen a dramatic turnaround in the value of what for many is their most valuable asset.

 

The average price of CREA-tracked homes sold in July was $326, 832. That’s an impressive 7.6 percent higher than homes sold in July of last year and a stunning turnaround from the 11.2 percent year-over-year decline registered as recently as January. Douglas Porter, an economist at BMO Capital Markets could not have put it better: “From the depths of despair just six months ago, housing prices are now chalking up record figures,” noted Porter. “Record low borrowing costs and the mounting sense that the worst of the economic storm has passed, are key ingredients in the remarkable turnaround.”

 

Recession probably not over … yet

Yet despite all of the optimism shown by resale home buyers, many of the other recently released economic statistics remain far less conclusive. For example according to the Canada Mortgage Housing Corporation, housing starts fell slightly during July to 132,100 units on a seasonally adjusted basis, due to volatility in the multiple starts segment. That bad news was reflected in Statistics Canada’s New Housing Price Index, which showed that contractors selling prices decreased by 2.0 percent during June, following a 1.0 percent decline in May.

 

The news was even worse on the labour front. Job creation - one of the key longer term drivers of housing demand - actually fell during July. Employment declined by 45,000 posts during the month, though the unemployment rate remained unchanged at 8.6 percent due to the fact that fewer people looked for work. In fact, youth employment, alone fell by 38,000 posts, and that is on top of the 33,300 jobs lost in that category during June. 

 

However not all of the news was bad. For example the value of building permits issued during June was $5.2 billion, up 1.0 percent from the May total. Increases were noted in both the residential and non-residential categories. In fact even on the housing starts front, not all is as bad as it appears at first glance. In this month’s report, the CMHC’s chief economist Bob Dugan noted that “over the next several years, housing starts will gradually become more closely aligned with to demographic demand, which is currently estimated at 175,000 units per year.”

 

Future housing demand remains uncertain

The big question right now for housing sector stakeholders is what will happen during the next few months. According to TD’s Gauthier, how long the current uptrend in resale housing will continue remains an open question. “Not even the stock market rally (+33 percent) since March can match the 61 percent recovery in existing home sales as of July,” commented Gauthier. “Although improved home affordability has decisively won recent rounds, its bout against a decisively weaker economy is not over by any means.”

 

Gauthier may be right. However two days before the Bank of Canada’s governor Mark Carney made his prediction about Canada moving out of recession during the current quarter, he made a move that greatly increased the chances that it would do just that. In the third week of July, the Bank of Canada released a statement that noted it was committed to maintaining its policy rate target at a miniscule 0.25 percent, at least until the end of the second quarter of 2010.

 

Since the central bank’s actions have a considerable impact on what goes on in bond markets and thus in influencing mortgage rates as well, this represents excellent news for the entire real estate sector. Interest expenses are by far the single largest cost of home ownership for most buyers. When borrowing costs are kept low, for a long period of time, the safe money tends to do a lot better by betting with (instead of against) the house.

 

Peter Diekmeyer is Bankrate.ca’s economics columnist.

 

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