We found out earlier today that the trade deficit in Canada rose significantly in September, largely on the back of meager demand south of the border.
US home price declines accelerate…approach Great Depression levels
According to a research report released yesterday by Zillow, a leading online real estate database, home price declines in the US have begun to accelerate after several months of deceleration. US home prices have now declined on a year-over-year basis for 51 months, including falling 4.3% year-over-year in the third quarter.
“With home values 25% below their peak and 51 consecutive months of declines, the length and severity of the current downturn is fast approaching the length and depth of the Depression-era housing declines. From the end of 1928 to the end of 1933 (60 months), nominal home values fell 25.9% according to Robert Shiller’s reconstruction of long-term home price appreciation in the United States.”
The US real estate channel website contained this little gem of a chart to provide a visual element to the quote above:
With inventory building, foreclosures surging, and demand dwindling, it’s hard to see what will spur a near-term rebound
This is the end result of a credit boom run amok. Demand cannot be stimulated….not with interest rates at historic lows and so much demand having been pulled forward by loosening credit standards and a societal shift towards consumerism. Yet the US Fed will try to reduce interest rates just a bit more. Perhaps they’ll find that magical number that will spur massively indebted consumers on to borrow more. Highly unlikely!
Consumer spending tied to home prices
Remember that at the end of the day, consumer spending and consumer confidence is largely tethered to the value of the average family’s largest asset….their home. With no way to put a floor under still-artificially high home prices, the chances of a consumer-led recovery are slim to none.
The following graph illustrates this phenomenon brilliantly. It shows annual changes in discretionary retail sales (a good measure of consumer spending) in red, and the year-over-year change in the Case-Shiller 10 city composite index in blue. This measures the average price changes in 10 large cities in the US. It is highly correlated with overall housing market direction.
You can see the correlation for yourself:
Where will the rebound in export demand come from? Euro land perhaps?
Needless to say, I don’t see exports to the US picking up soon. As for Europe, our second largest trading partner, it will be interesting to see how things unfold there as the PIIGS are once again seeing bond prices drop, meaning interest rates and risk premiums are marching markedly higher. I see some sort of a bail out for Ireland before next spring, while Portugal and Greece will likely need some form of restructuring. Hard to know just how that will affect demand for Canadian goods, but we do know that times of significant uncertainty cause people to save…just in case.
Not just a U.S. story
I can’t emphasize enough that I believe that the tone of the mainstream media and bank economist reports have caused many people to be comforted by the fact that we are different in some ways to our American peers. As the usual tag line goes, ‘the risk of a US-style meltdown are minimal’, to which I would respond, ‘fair enough and I largely agree….but what about an Ireland-style meltdown, where by the end of this year it is estimated that 25% of all borrowers will have negative equity?”
Or what about the UK? Their experience is eerily similar to our own. After falling nearly 20% in 2008 and early 2009, home prices shot higher, fuelled by temporary and now rapidly fading stimulus measures and emergency interest rates. Yet this week we find out that home prices in the UK are falling at the fastest pace seen since the Great Recession ‘ended’.
Well what about France, Spain, and Italy?
In all cases property values plummeted from their peaks in 2009, as shown in the chart. In some cases the fall was temporarily halted by the same emergency measures that gave Canada’s and the UK’s housing market one last gasp. But the story is the same in all of these countries: Falling home prices are resuming and the trend is accelerating.
So let’s dispense once and for all with the notion that just because an American-style meltdown is unlikely, we are somehow out of the woods and can now be complacent. What we saw in the Fall of 2008 was the busting of a once in a century debt bubble that had engulfed much of the Western world. I don’t expect our property prices to escape unscathed, nor do I believe that we have yet to grasp the full implications of what happened in 2008.
QE2 not the solution
In response to an email I received last week regarding the effectiveness of QE2 in the US, I wrote the following:
“Remember that QE2 provides liquidity, but it can’t put a gun to the consumer’s head and force them to borrow and spend. Therefore I think it will likely sit in bank vaults as future loan loss provisions, with very little making its way into the economy.
Remember that the money supply in the US is dwarfed by outstanding credit. Think about that for a while! Of the outstanding credit, the Fed really only has control over about 5% of it. So QE2 is a drop in the bucket, despite how massive that number sounds. If credit is contracting at a greater rate, QE2 will be absorbed into the abyss of credit write-downs, necessitating QE3, then QE4, etc. At some point, consumer deleveraging will run its course, THEN you’ve got a recipe for rampant inflation with all the excess reserves sitting idle at the banks. But I don’t see that right away.”
So with an impotent plan in place and demand falling, what are the chances of a US led recovery boosting demand for our goods? Touch the tip of your index finger to the tip of your thumb on the same hand. That’s about right!
And the next time that someone tells you that our real estate prices are safe because some bank-employed economist told them that a US style drop is unlikely, ask them to name any other country in the Western world. Then pull up a chart of their home prices. Chances are they are in the same battle that we are here in Canada. This is largely a global issue. We’re not as different as we like to believe we are.