Housing Market

Housing market

This lesson will cover the following

  • How housing data affects currencies?
  • New Home Sales
  • Pending Home Sales
  • Existing Home Sales
  • Housing Starts and Building permits
  • Interest Rate Sensitivity

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Housing reports refer to the economic news data released by the United States Census Bureau, National Association of Realtors and the Lloyds Banking Group in the United Kingdom regarding economic activity in the housing sub-sector of the economies of both countries. This data is an integral part of the economic news calendar of the Forex market.

Reports from those departments include the number of new houses bought by customers, the number of old houses bought by customers, house orders which are pending, building permits, housing prices and other housing data. They give traders information of how much economic activity there is in the housing and mortgage sectors of an economy.

How housing data affects Forex?

Housing data attracted lots of attention in 2006 leading up to the global financial crisis in 2008 following the collapse of the mortgage market in the US, the UK, Europe and several other prominent world economies. Since then, housing data have become a benchmark with which to measure economic performance in many countries and as such, they now have a marked influence on the values of the currencies of the countries where these data come from.

Seeing the effect a problem in the housing sub-sector had on financial markets, it is obvious to notice why housing data are now seen as a barometer of economic performance. You can trade any of the following housing data in the Forex market.

house_homeThe most important housing figures come from New Home Sales (US), Existing Home Sales (US), Pending Home Sales (US). Less significant but still influential information is gathered by Housing Starts (US, Canada), Building Permits (US, Canada), Halifax House Price Index (UK)

With the USD being counter traded against the major currencies like the EUR, GBP, AUD, CAD, CHF, a trader can trade the USD depending on whether the data released is USD positive or negative.

New Home Sales

The United States Census Bureau publishes the New Home Sales economic indicator on their web-site on a monthly basis, towards the end of each month. The monthly rates are reported unadjusted, however, the annual rates are reported as seasonally adjusted. The indicator records sales of new home constructions in the United States.

There are several points to watch out for when interpreting the New Home Sales numbers. First of all, the statistics does not record any houses that are not going to be sold immediately. As for example a house is commissioned to be built on an existing plot of land that the purchaser owns.

folder-contract-iconSecondly, the statistics are taken at the point where a customer has signed a sales contract or has put a deposit down. At this point the house can be at any stage of construction.

Thirdly, the sales figures are not adjusted to take into account of the sales contracts which are eventually canceled by the builder or the customer. However, the same house is not included in any subsequent count when it is eventually sold to another customer.

This particular report has a considerable impact on the markets as new home sales can trigger a rise in consumption. It is also an excellent indicator of any economic downturns or upturns due to the sensitivity of its consumer income. When new home sales fall over several months this usually is a precursor to an economic depression.

The following graph shows the influence of New Home Sales data release on EUR/USD. The report was lagging forecasts which triggered the upward move of the pair after 15:00 GMT as you can see from the chart below.

New Home Sales 4.12. 15.00 GMT

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Source: MetaTrader 4 by MetaQuotes Software Corp.

Pending Home Sales

The pending home sales index is a fairly new major indicator which was developed by the National Association of Realtors. It provides information on the number of future home sales which are in the pipeline. It gathers data from real estate agents and brokers at the point of a sale of contract and is currently the most accurate indicator in the house market sector. Pending home sales become actual home sales about two months later and so this index has a forecasting value of the actual home sales.

How does the index work? When a sales contract is accepted for a property it is recorded as a pending home sale. This particular economic indicator is considered to be more accurate than other housing indicators because it samples over 20% of the market. In addition over 80% of pending house sales is converted to actual sales within 2 or 3 months. Although there are some cancellations, there are not enough for the data to be skewed one way or another. The index base value is equal to 100 and the base year is 2001 when there was a high level of home sales.

Existing home sales

3-Gray-Home-iconAlso published by The National Association of Realtors (NAR), the index of existing home sales stands for the third major gauge, reflecting conditions in US real estate market. Within a close range to the 25th of each month, the NAR publishes data regarding sales and values of existing homes in the four major regions of the United States. The sample of data encompasses condos, co-ops and single-family houses.

Statistical data on existing home sales is often used along with statistical figures regarding the New Home Sales and Pending Home Sales, with the major objective being to reach a conclusion how the economy in nation’s housing sector is performing, regardless of the interest rates. The most active house-purchasing period in the United States is usually between the months of March through June. Thus, in case statistical data reveals a sudden drop in the number of homes sold rather than an improvement during this period, this is considered as a signal of weakness in country’s housing market.

Limited impact

Existing home sales report usually does not cause a real direct impact on economy in the United States. Actually, this effect appears to be minimal, due to the fact that nothing is produced with the mere sale of an existing home. In terms of economic activity, the sale of an existing house may be related only to interior design and purchases of new furniture.

New home sales report, however, usually has a more considerable impact on the market. Sales of new homes usually are associated with a significant economic activity, while in some cases a resilient housing sector has the potential to pull an entire economy out of recession.

The reason markets pay a certain attention to existing home sales report is that it reveals much about the general course of nation’s economy. A major part of the population considers a house as a sign of wealth and unlike the money wealth, that is concentrated in certain regions of the country and held by the wealthiest representatives of the population, “housing wealth” is evenly distributed across the country.

Housing Starts and Building permits

Documents-iconHousing starts and building permits are indicators of moderate importance, and respectively they introduce moderate volatility in the Forex market. In order to obtain this data, individuals can visit the Census Bureau of the US Department of Commerce, while these reports are published around the 16th of each month. Economic calendars can also provide actual information regarding the official figures.

Housing Starts represent a gauge of measuring residential units on which construction has already begun every month. A start in construction is defined as the foundation for the building and it encompasses residential housing primarily.

Building permits are permits issued in order to allow excavation. An increase in the number of building permits and housing starts usually happens a few months after mortgage rates have been cut. Permits usually lead starts, but permits are not required in all regions of the country. That is why the number of permits tends to be below that of housing starts in time.

Halifax House Price Index

This indicator shows the level of change in real estate and house prices in the UK. It is calculated by Lloyds Banking Group. This indicator has limited online Forex market influence. The data on Halifax House Price Index UK is published at the end of each month.

Interest Rate Sensitivity

068854-black-inlay-crystal-clear-bubble-icon-alphanumeric-percent-signHousing market is considered to be the most interest-rate sensitive sector of an economy. It often experiences huge changes in activity, which come as a response to changes in long-term interest rates, such as rates on mortgages. Residential investment provides about 4 percent of nation’s GDP. However, because of its volatility, it may often provide a much larger proportion of changes in the GDP figure, if relatively short time periods are taken into account. Housing sector is closely watched by policy makers, as it may provide clues about macroeconomic performance in a short term and may reveal the effects produced by changes in financial environment.

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