Home Sales – Forex Academy

Importance Of ‘Existing Home Sales’ Forex Fundamental Indicator

Introduction

In any economy, the real estate market provides insights about households’ sentiment of the future and their present welfare. Policymakers, central bankers, businesses, economic analysts, and individual consumers track real estate data. They do so, to deduce, in one form or another, information about the state of the economy. The Existing Home Sales figure is estimated to account for up to 90% of total home sales. For forex traders, existing-home sales data provides an invaluable insight into the economy.

Understanding Existing Home Sales

Existing homes are homes owned and occupied before being listed in the market. Therefore, existing home sales as an economic indicator show the data on the sale of homes pre-owned and pre-occupied before being listed in the market.

Existing home sales data captures the prices and sales volume of existing homes in a country. It is worth noting that the existing home sales data strictly records transactions that have been completed. This record is unlike the new home sales, which includes data on partial payments and agreements of sale.

Calculating Existing Home Sales

Each month, a survey is done to determine the volume of existing-home sales and their prices. In the US, for example, a survey is done by selecting a nationally representative sample of 160 Boards and Multiple Listing Services. This sample represents about 40% of the total existing-home sales.

A non-seasonally adjusted data on existing home sales is derived by aggregating the raw data from the sample. The aggregated data is then weighted to represent the national existing home sales accurately.

A seasonally adjusted existing home sales data is arrived at by annualizing. This adjustment helps to smoothen out the disparities that arise due to seasons. Here’s how the disparity comes along. Research has shown that home resales are higher during spring and summer and slows down during winter. Therefore, from November to February, the resale of homes is lower. Typically, it is assumed that people tend to search for homes when the weather conditions are more agreeable, thus increasing demand and, with it, prices of homes. This seasonal difference is removed with annualizing, creating a more realistic trend in the existing home sales.

Note that the annualized existing home sales for a particular month show the resales the month represents if the resale pace for that month were to be maintained for 12 consecutive months.

Using Existing Home Sales in Analysis

As an economic indicator, existing home sales are regarded as a lagging indicator. However, since the data shows the changes in the number of home resales and the prices, it can provide invaluable insight into the trend of households’ welfare and the general economic health.

Most of the transactions in real estate involve mortgages. Let’s take an example of an increase in existing home sales shows that more households can afford and service mortgages. This increase could be for a number of reasons.

Source: St. Louis FRED

Firstly, it could show that the welfare of the households has improved. The improvement could result from an increase in disposable income or an increase in the rate of employment. Increasing disposable income means that households have more money to invest in the real estate market, whether speculatively or not. An increase in the employment levels, on the other hand, means that households who previously could not afford to buy a home are now eligible for mortgages. I both these instances, the existing home sales data shows that the economy is expanding and the welfare of households is improved.

Secondly, increasing home sales imply that interest rates are low, allowing more households to borrow cheaply. The availability of lower interest rates shows that the demand in the economy is bound to increase, which leads to economic growth.

Thirdly, since existing home sales involve the current homeowners selling their property, it means that they believe they can get better rates in the current market. This is especially true for speculative investors who participate in real estate to profit from price fluctuations over time. Now, a speculative homeowner buys a home at a lower price to resell when prices are higher. An increase in the price of homes means the economy is currently performing better than it previously did. Thus, an increase in the existing home sales shows economic improvement.

Similarly, current speculating home buyers offer the sentiment that they believe the economy is going to perform better in the near term. Therefore, existing-home sales data can be used to show periods of economic recoveries and forestall an impending recession.

Source: St. Louis FRED

Impact on Currency

As we have seen, existing home sales can be used to gauge how the economy is performing. Although it is lagging, it can be used as a leading indicator for the aggregate demand in the economy as well as the general economic health. Let’s see how this analysis affects the forex market.

An increase in the existing home sales shows that the economy has been performing well. It also indicates that households’ welfare is improving, with higher employment levels and increased disposable income, which can further influence the growth of the economy. Similarly, since an increase in the existing home sales offers the sentiment of a perceived economic improvement, it translates to the increasing value of the country’s currency.

Conversely, a country’s currency will depreciate as the existing home sales reduce. Continually dropping existing home sales imply worsening economic conditions for the households. These adverse conditions could result from increasing unemployment levels, higher income taxes, or general anticipation of challenging economic conditions that force households to cut back on discretionary expenditures.

Sources of Data

The National Association of Realtors is responsible for the survey and the publication of the US existing home sales data. An in-depth and historical review of the existing home sales data, both seasonally and non-seasonally adjusted, is published by St. Louis FRED. Trading Economics publishes global existing home sales data.

How the Monthly Existing Home Sales Data Release Affects Forex Price Charts

The most recent existing-home sales data in the US was released on September 22, 2020, at 10.00 AM ET and can be accessed at Forex Factory.

The screengrab below is of the monthly existing home sales from Forex Factory. To the right is a legend that indicates the level of impact the fundamental indicator has on the USD.

As can be seen, this is a low-impact indicator.

In August 2020, existing home sales were 6m compared to 5.86m in July. The sales were lower than analysts’ expectations of 6.05m.

Now, let’s see how this release made an impact on the Forex price charts.

EUR/USD: Before Existing Home Sales Release on September 22, 2020, 
Just Before 10.00 AM ET

The pair was trading in a new-found steady downtrend. This trend can be seen with the 20-period MA steeply falling with candles forming further below it.

EUR/USD: After Existing Home Sales Release on September 22, 2020, at 10.00 AM ET

After the news release, the pair formed a 5-minute ‘Doji’ candle. Subsequently, the pair continued to trade in the earlier observed downtrend.

Bottom Line

As expected, the existing home sales release had a negligible effect on the EUR/USD pair. Therefore, we conclude that in the forex market, existing-home sales data is a negligible indicator.

Understanding The Importance Of ‘New Home Sales’ Macro Economic Indicator

Introduction

In any economy, demand is one of the primary leading indicators of economic growth and inflation. Therefore, the aggregate demand data plays a vital role in predicting economic growth and possible monetary and fiscal policies. Although considered a lagging indicator, the data on new home sales provides insight into households’ changing demand and their income situation.

Understanding New Home Sales

As the name suggests, new home sales provide data on the newly built single-family that were sold or are for sale during a given period. New home sales data is also referred to as new residential sales. Sales mean that a deposit for the house has been taken or a sales agreement has been signed.

The data on new home sales is derived from a survey of a sample of houses from the building permits register. Since the data obtained is from a sample survey, it is bound to be subject to sampling variability as well as non-sampling error. Response bias, nonreporting, and under-coverage factors also influence this data. Nonetheless, the data is nationally representative.

The new home sales report shows data for the new privately-owned houses and new houses by construction stage. The report presents data that are both seasonally adjusted and those not seasonally adjusted.

The number of units sold during the period
The number of units for sale at the end of that period
The ratio between the houses sold and those for sale
The median and average sale price

How to use New Home Sales Data for Analysis

Although the new home sales data is generally regarded as a lagging economic indicator of demand in real estate, there is no dispute that broader macroeconomic trends influence new home sales. Here are some of the factors that influence new home sales.

Household income: Significant changes in the households’ disposable income will change their demand for new homes. Disposable income is the residual amount after paying taxes. These income changes could be brought about by an increase in wages, reduction in taxes, or investment windfall. If there is an increase in disposable income, households’ demand for new homes will increase. They could right away purchase already completed units or get into sale agreements for houses ongoing construction. Therefore, new home sales can be expected to increase during the period of increased household income. Conversely, a decrease in disposable income will make households cut back on non-essential expenditure, such as buying new homes. Consequently, new home sales will be expected to decline.

Unemployment: The rate of unemployment in the economy is directly linked to the households’ welfare. A lower unemployment rate implies that more households have income and can thus afford to put down deposits for a new home. Similarly, the unemployment rate reduction signifies that more people can afford to service a mortgage loan. Therefore, a low unemployment rate can be correlated to an increase in the demand for new houses, hence increasing new home sales.

Source: St. Louis FRED

Conversely, higher rates of unemployment mean that more people are out of gainful employment. This instance forces households to prioritize their expenditures to cater to the essential items. Furthermore, higher unemployment could mean that more households do not qualify for a mortgage. Thus, a reduction in the new home sales can be expected with increasing unemployment.

Interest rate: In the financial markets, the prevailing interest rate determines the cost of borrowing – especially home mortgages. When interest rates are low, it means that more households can afford to borrow cheaply. It becomes easier for households to service debt without digging too much into their income, thus ensuring no significant changes in their welfare. Since most households can afford to borrow cheaply when interest rates are low, the demand for new homes can be expected to increase.

When interest rates are high, the cost of borrowing increases, and with it, the cost of a mortgage. Higher rates would restrict some households from servicing expensive debt without significantly impacting their welfare. Thus, with an increasing interest rate, it can be expected that new home sales will decline.

Impact on Currency

The new home sales data can impact a country’s currency in several ways. Here is how.

The new home sales can be used to show economic recoveries. Buyers of new homes could be speculative buyers – those who expect these homes’ prices to increase in the future then resell. To them, to them, new homes are an investment. Thus, the new home sales data can be taken as a sentiment about the economy. An increase in the new home sales could imply that the future economy is expected to improve. Similarly, in times of recessions, like the current coronavirus-inflicted recession, the new home sales data can be used to show market recovery. Therefore, an increase in the new home sales can be seen as a sign of economic recovery, which increases the value of the currency relative to others.

The new home sales can also be used to show when an economy is headed for a recession. Typically, recessions are punctuated with declining economic conditions, such as an increasing unemployment rate. Continually declining new home sales could indicate a looming recession as economic welfare of households is deteriorating. Furthermore, in these circumstances, expansionary monetary and fiscal policies tend to be implemented. These policies are designed to prevent the worst-case scenario from playing out. In the first quarter of 2020, such expansionary policies were witnessed globally. They were meant to prevent extreme economic shocks from the coronavirus pandemic. These policies result in the depreciating of the currency relative to other currencies.

Sources of Data

In the US, for example, the US Census Bureau conducts the survey and publishes the new home sales data for the US. An in-depth and historical review of the US’s new home sales is available at St. Louis FRED. Trading Economics publishes new home sales data for countries globally. Furthermore, you can access the forecast of the new home sales globally up to 2022.

How New Home Sales Data Release Affects Forex Price Charts

The most recent release of the US’s new home sales was on September 24, 2020, at 10.00 AM ET. The news release can be accessed at Investing.com.

The screengrab below is of the monthly new home sales from Investing.com. On the right, we can see a legend that indicates the level of impact this fundamental indicator has on the USD.

As can be seen, high volatility is to be expected.

In August 2020, the new home sales were 1011K compared to 965K in July. The sales were higher than the anticipated 895K. Thus, a strong USD is expected.

Now, let’s see how this release made an impact on the Forex price charts.

EUR/USD: Before New Home Sales Release on September 24, 2020, 
Just Before 10.00 AM ET

Before the news release, the EUR/USD pair was trading in a neutral pattern as the 5-minute candles formed just around a flattening 20-MA.

EUR/USD: After New Home Sales Release on September 24, 2020, at 10.00 AM ET

After the news release, the pair formed a 5-minute ‘hammer’ candle, indicating that the USD weakened. Subsequently, the pair adopted a bullish stance with the 20-period MA rising.

As shown by the above analyses, the US new home sales data release failed to produce significant volatility. Therefore, we can conclude that new home sales are insignificant in the forex market as an economic indicator.