Alex Carrick: America’s housing crunch


The big gaping hole in the world economy is U.S. housing starts.

Stuck at around half a million starts seasonally adjusted and annualized, the figure is way below where it should be in a normal cyclical recovery.

U.S. home starts in a typical year would be 1.6 million to 1.8 million units. They reached as high as 2.2 million before the recession.

U.S. housing has been in a depression for six years. One quarter of the 8.5 million jobs lost in the U.S. can be explained by the drop-off in workers laying foundations, framing and finishing houses, plus ancillary employment in real estate, the legal professions and design offices, not to mention the manufacture of building products.

How to get out of this mess? There are millions of young Americans living at home. As the economy gradually picks up steam, they are finding employment and moving out on their own.

This is a source of what’s known in the economics world as family formations. More families, even if they may consist of only one person, mean the need for more housing starts.

In the initial stages this draws on rental units. Rental units these days are repurposed condos.

One large source of housing demand in the U.S. is illegal immigration which has been curbed by more aggressive policing and the overall decline in business activity levels. Many foreigners have returned home.

Now I come to another source of weakness in U.S. home starts and it’s a word that is having a pervasively bad effect around the world: debt.

Excessive debt in many forms is holding back world growth. For a number of countries, it’s taking the form of sovereign debt. I’ll have more to say on that subject in a moment.

With respect to U.S. housing starts, it’s debt at the personal level that has accounted for much of the problem.

Teaser-rate mortgages led to too many people receiving approvals for home purchase loans in the early 2000s they couldn’t afford once interest rates began rising at the mid-point of the decade.

The subsequent collapse of collateralized debt obligations (CDOs) brought the world to the edge of financial collapse. The investment banks imploded, U.S. home prices plunged and mortgage foreclosures skyrocketed.

The two key U.S. mortgage lending agencies—Fannie Mae and Freddie Mac—needed overt   intervention by Washington to survive. In reaction to their previous mistakes in lending too leniently, those agencies have now become too conservative.

The pendulum has swung too far to the side of caution. Given the bargains that are now available in U.S. housing, in terms of record-low prices and interest rates, there is a pool of individuals and families that would be interested in exploring home ownership.

Requests for bigger down payments and higher credit scores are denying potential homeowners access to funds. The log jam needs to broken.

With respect to debt at the international level, Greece has been flirting with default. The government in Athens has accepted a need for even greater austerity measures than have already been taken.

This is much to the disgust of an electorate that has expressed its dissatisfaction through ongoing street protests and riots.

The IMF, European Union and European Central Bank thought they’d come up with a solution to the latest financing crisis that called on private lending agencies to “voluntarily” roll over Greek debt. But certain rating agencies said, “Hold on a second. In our view, that would be a technical default.”

Use of the word “default” in such a situation has serious implications in terms of triggering automatic insurance payments. This is where the fresh and confusing world of derivatives enters the picture. A relatively new financial instrument is something called a credit default swap that insures one party or another—lender or borrower—in the event of a failure to repay.

The private sector owners of Greek debt have been largely determined. They are German banks in the forefront, followed by French banks. Nobody seems to be quite sure who’s left holding the hot potato that is the credit default swaps.

There is a logical contradiction that complicates the sovereign debt problem. Countries need a certain amount of debt to drive growth, particularly when it comes to kick-starting an economy after a recession.

But too much debt is obviously a problem as well. It’s easy to say measures need to be taken to reduce exorbitant sums that are owing. But this becomes a timing question.

Massive austerity to reduce Greece’s debt will take away that nation’s growth potential. And it is growth that eventually leads to government revenue increases, through taxes, royalties, fees and so on that cut into deficits.

The U.S. has a problem of a similar nature. A $14.3 trillion debt ceiling to be breached in early August is creating considerable consternation in Washington.

To bring the annual deficit down, the Democrats are reluctant to cut too deeply into social assistance. The Republicans are adamantly opposed to any measures that would smack of a tax increase. The result is an impasse that threatens to damage America’s credit rating.

Again, the issue concerns the timing of debt-fighting measures. Given the shakiness of the U.S. recovery, is now the time to be cutting back government spending?

The reason there is such an impasse in Washington is because there is no easy answer.

Maintaining government spending may be necessary to provide a base level of economic activity the private sector can build on. Alternatively, serious cuts to the deficit might provide a shot in the arm through restoring confidence that the nation’s finances are indeed manageable and can be brought back under control.

We come now, by an admittedly circuitous route, to Canada. Given that the world is going through a tough patch at the moment, what should we be watching for in this country?

I would say the canary in our mine shaft—in other words the first indications of a poisoning of the economic atmosphere—would be a drop in house prices.
By the way, new and existing home prices here are still rising, gradually in the case of the former and more rapidly with respect to the latter.

So much of consumer confidence and retail spending—think furniture, appliances, entertainment and electronic products, as well as renovation materials and services—are tied to a vibrant residential real estate sector.

As long as new and resale home prices are on an upward incline or at least exhibit stability, the canary will continue to sing a cheery tune.

Alex Carrick is Chief Economist with CanaData, a division of Reed Construction Data (RCD). CanaData is the leading supplier of statistics and forecasting information for the Canadian construction industry. RCD is a division of the global publishing firm, Reed Elsevier. For more economic insight from RCD, please visit Mr. Carrick’s lifestyle blog is at and he would welcome a follow on Twitter (Alex_Carrick) or Facebook.