The financial crisis began in the U.S. housing sector and its recovery path depends on housing stabilizing and, fortunately, there are now encouraging signs of a bottoming in the U.S. housing market.
Initial Indicators of a Housing Turnaround
Sales of existing and new U.S. homes increased in February. In addition, mortgage rates are down sharply as the U.S. Federal Reserve Board began purchasing $500 billion in mortgage-backed securities. A 30-year fixed rate mortgage in the U.S. is now down to 4.63%, the lowest level since 1971. This has triggered a surge in mortgage refinancing, which in turn will boost household finances and make defaults less likely. In addition, the U.S. has provided strong incentives for first-time homebuyers – up to $8,000 in tax credits for those who qualify.
Special offer mortgage rates in Canada are down to 3.85% for 1-year mortgage rates and 4.25% for 5-year mortgages. Existing home sales in Canada in February showed the first month-to-month increase since September 2008 and we are expecting March sales to show a second consecutive increase.
Panic Levels have Eased
The improved tone in the financial markets in March reflects an increased belief that worst-case scenarios are not as threatening. Panic has eased in the last month, providing a calmer emotional setting for emergency policy measures to work. The U.S. government is making progress in dealing with the financial crisis – U.S. Treasury Secretary Geithner has outlined a credible first step in dealing with toxic assets. And the Fed’s decision to purchase U.S. government bonds will prevent a contraction in the money supply. It was a major contraction in the money supply between 1929 and 1933 that created the deflationary trap and brought on the Great Depression.
Impact of Policy Measures will Take Time
The U.S and Canadian policy measures will eventually work but with a lag. There is still plenty of negative economic fallout – bankruptcies and job losses are expected to continue. The U.S. economy is in a very serious recession with real GDP declining at an annual rate of 6.3% in the fourth quarter of 2008. In Canada, real GDP is forecast to decline by 2.5% in 2009 and Canada is expected to outperform the U.S. with a 2.0% annual GDP growth rate in 2010.
Oil and Commodities
Global commodity demand is likely to continue to contract and forestry products will be the weakest sector. Newsprint demand reflects the slump in print advertising and lumber prices will remain low until U.S. residential construction recovers. The world oil price has held up remarkably well despite a second consecutive year of declining global oil consumption. Reductions on the supply side have played an important role in keeping the West Texas Intermediate crude oil price above levels experienced in the last recession. An eventual recovery in the U.S. and growth revival in China should lift both oil and base metal prices. This will add to the provincial employment and income recovery in Alberta, British Columbia and Newfoundland. Ontario faces a slower recovery in 2010 as a result of the long-term challenge to the auto industry.
Canada’s Recession not as Severe
For Canadians, this recession is not focused on any particular region or economic sector. The credit squeeze and global downturn have overwhelmed all of Canada’s provinces. Fortunately, the recession here is not as severe as the one in the United States. The downturn began a year later in Canada, which means that household and corporate balance sheets are in better shape and this will add to Canada’s recovery potential when the recession ends.
These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.