By Peter G. Hall, Vice-President and Chief Economist
Enjoying the great summer weather? I hope it’s giving you a chance to rest and recharge. For some industries, though, it’s top-season. Construction is one of them. In particular, home-building takes advantage of the warmer months to get a good chunk of the year’s supply in place. If the market is hot, then summer construction tells the tale. Stateside, market potential has been strong for a long time, but demand has failed to break out of its sub-par range. Is U.S. housing in step with the hot summer temperatures, or defying them?
Before answering, it’s important to understand why the U.S. housing market has been so low for so long. Back in 2009, it was traumatized. Years of overbuilding, which saw housing starts peak at over 2 million units annually, created a glut of supply that triggered a collapse of new construction to the half-million-unit level. The industry stayed in that chasm for three years, and crawled out steadily. It’s now hovering just below the 1.2 million unit level, impressive to some, but still well shy of the generally accepted ‘water line’ of demographic need.
That makes perfect sense if the U.S. market is still absorbing that massive pre-recession glut. However, there are few today that believe this. First, we are now close to seven years beyond the recession, ample time to close the demand-supply gap. Second, the depth of the market plunge accelerated the absorption of the surplus, as huge as it was. Third, various measures show that the U.S. market is actually in deficit, and it is arguable that the deficit is growing by the month.
While that might sound like a stretch, consider that demographic demand pegs the annual need at about 1.4 million units. Then consider that after any period of under-building, there is usually a surge of construction that boosts units beyond basic requirements for a time. Even if underlying demand is somewhat less than the 1.4 million mark, starts currently stuck at 1.2 million units still defy past experience.
This has caused market-watchers and other hangers-on to do the usual. Impatient at the market’s intransigence, they are casting about for possible structural explanations – in plainer language, why “it’s different this time”. Canadians have seen this all before. Back in the 1990’s we had a very sluggish recovery thanks to significant fiscal reform. Housing plunged, and took a long time to recover. Analysts sharpened their pencils, and invented a host of explanations as to why housing demand was now permanently lower. Data corroborated their calculations – until the fiscal reform was complete, and the economy re-righted itself. Housing starts zoomed back to levels analysts never thought they’d ever see again…and all those ‘new’ arguments were hastily discarded.
This time around, the arguments for the U.S. market have a familiar ring. What about the one that says that millennials have different preferences? Their ‘nesting’ instincts are different; their housing preferences have changed; attitudes toward household formation aren’t what they used to be, and so on. Sure there is truth to these assertions – but the very same was said of Canada’s market in the 1990’s, and it still roared back. How about the debt-load argument? That is, unable to find work, millennials have gone back to school, and have piled up debts to the point that they can’t afford a down-payment? Sounds compelling, until we see that indebtedness among the young is lower than it was ten years ago.
If Canadian history is indeed a guide for the current U.S. experience, then it likely boils down to job-creation for the young. What’s troubling about the impressive multi-year gain in U.S. employment is that it has left out a large chunk of the labour force, including the youth. What is exciting, though, is that this seems to be changing. Faced with a low unemployment rate and looming labour shortages, companies no longer have the luxury of hiring experienced workers. They are now tapping into the youth market again, as evidenced by the recent jump in youth labour force participation. If this continues, history suggests that housing won’t be far behind.
The bottom line? It has been a long wait, but if the very recent increase of youth labour force participation is indeed a trend, the embattled U.S. housing market is in for an up-shift. That’s good news for Canadian exporters well beyond just the wood sector.
This commentary is presented for informational purposes only. It is not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. Neither EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.