Half empty or half full?

Once again, the U.S. housing market was either half empty or half full depending on your point of view. Existing home sales slipped to 3,780,000 (annualized) in December, down 1.0% from November and 6.2% YoY.

Total existing home sales in 2023 came to 4,090,000, “the lowest level since 1995,” says NAR. Meanwhile, the annual median price hit an all-time high of $389,800. That’s the bad news; now the good news,

At 664,000 (annualized) in December, new home sales were up 8.0% from November and up 4.4% YoY. The 2023 median price was $427,400, down 6.6% YoY—and heading in the right direction. December landed at $413,200, down 13.8% from $479,500 in Dec 2022.

New home sales are holding up for a couple of reasons. First, you can hardly find an existing home to buy; the supply for for-sale inventory is 3.2 months, barely half of the six-month supply that indicates a balance between supply and demand.

Second, production builders are propping sales up with a variety of incentives, including rate buydowns that make it possible to get a mortgage at 5% or even less. That may speak volumes to what we can expect once the Federal funds rate drops and interest rates come down.

In the meantime, new home construction is doing better than expected—as long as your expectations are low enough. Multifamily starts finished 2023 at 468,600, down 14.4% YoY. Single-family starts came in at 944,500, down 6.0% from 2022. But the year ended on a high note, with annualized starts cracking the 1.0 million mark in both November and December.

Total housing starts in 2023 were 1,413,100. That’s down 9.0% YoY but ahead of nearly all analysts’ forecasts. Plus, Q4 2023 GDP just came in at +3.3%. We’re still trying.

Canada was a mixed bag, too, but Canada has a bigger affordability problem than the U.S. According to the Canadian Real Estate Association, the average price of all homes listed in its MLS has fallen nearly 20% from its peak, $816,646 in Feb 2022. But the current average is still $657,145 ($488,423 USD).

Home sales as reported by the Canadian Real Estate Association fell 11.1% in 2023 but closed the year on a positive note, jumping 8.7% from November to December. CREA senior economist Shaun Cathcart warns that it’s probably not a good idea to read too much into the December sales spike.

Rather than a prelude to a recovery, he says, “it was more likely just some of the sellers and buyers that were holding onto unrealistic pricing expectations last fall finally coming together to get deals done before the end of the year.”

Like the U.S., Canada is struggling to build enough housing units to meet demand. Total housing starts in 2023 were down 8.2% according to CMHC, but that’s a little misleading: SFD starts were down 24.8% while multiples were down just 1.9%.

Price inflation since the COVID shutdowns has driven Canadian home buyers out of the single-family detached market in favor of more affordable townhouses and condos. But also like the U.S., Canada hasn’t been able to build enough new units to meet demand. CMHC says regulatory barriers are the primary culprit. It found a clear connection between the degree of land use regulation and the price-to-income ratio.

In both countries, the solution is the same: Build more houses. In mid-2023, John Burns Research & Consulting estimated that the U.S. needs 17 million new housing units by 2030 to catch up to population growth—i.e., roughly 2.4 million units per year if we start this year.

With a population equal to about 11% of the U.S., Canada needs 3.5 million new units by 2030 according to CMHC. That’s 5.0 million units per year in a country that averaged just south of 240,000 per year over the past five years.

It’s possible that many of today’s multigenerational and doubled-up households will stay that way and reduce the pressure somewhat. But it sure looks like we’re going to be able to count on strong pent-up demand for a long time to come.

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