How to Use Housing Indices in Forex Trading
The US housing market crash in 2007 led to the global financial crisis a year later. Such is the impact of housing market data on the global economy. The housing market data reflect the inherent strength of a country’s economy. Thus, it has a profound influence on the currency value of the respective country from where the data is emerging. Having a good understanding of the housing data would enable a currency trader to take short or long position at the right time in the appropriate currency pair in the Forex market.
Why is housing data important?
During periods of strong economic activity, the housing market contributes to nearly 20% of GDP. This is particularly true in the case of the USA. Heightened construction activity has a positive effect on the GDP in two ways. Naturally, the first one is the increase in GDP because of a rise in the purchase of homes. Home purchase usually leads to a demand for housing services and ultimately an increase in the consumer spending. In the US, residential investment contributes to 5% of GDP. The residential investment drives consumer spending. This contributes between 12% and 15% of the GDP of the US. For example, in 2021, the construction activity contributed about $955 billion or 4% of the GDP of US. In 2006, when the housing market was at its peak, the construction activity contributed $1.195 trillion or 8.9% of the US GDP at that time. Thus, a decline in the housing market will have a huge negative effect on the overall procurement and manufacturing industry. It should be noted that real estate construction is labor intensive. Thus, a collapse in the housing market will eventually lead to a surge in the unemployment rate.
When there is a decline in the real estate activity, the value of residential properties starts falling. A house owner may or may not have an intention to sell his home. However, he will be affected by the considerable decrease in the mortgage loan offered by financial institutions. Ultimately, this leads to a decrease in the consumer spending. It should be noted that consumer spending accounts for nearly 70% of GDP in the USA.
A decrease in the consumer spending further increases the unemployment rate, decreases income and reduces spending. This cyclical effect would finally lead to recession. That is why market closely monitors the housing data, such as housing starts, which is a leading indicator of the economy.
Effect of housing data on the currency rate
When the housing sector data is positive, a central bank of the respective country would attempt to maintain a controlled growth. To do so, the central bank would increase the interest rates to flush out unnecessary liquidity from the system. A rise in the interest rates would attract investors, thereby leading to a gain in the value of the country’s currency. The quantum of rise in the strength of the currency depends on the type of the housing index data and the amount of optimism it carries.
When the housing market starts declining, to spur growth, a central bank will attempt to increase the liquidity in the market. An interest rate cut would deter investors, thereby resulting in a decline in the value of the currency of the respective country.
Different kinds of housing data
There are different kinds of housing data reported by various institutions. Most of the housing data are reported on a monthly basis.
- New home sales — The unadjusted data, published on a monthly basis by the US Census Bureau, reflect the sale of new houses being constructed. The organization also publishes seasonally adjusted annual sales data. The data is expressed as a percentage on a month-over-month basis. The impact of the data on the currency market is moderate.
- Pending home sales — It is a relatively new index created by the National Association of Realtors. The data is accumulated from real estate agents and brokers. The pending or future home sales become the actual home sales in a span of two months. Thus, it is considered an accurate indicator of the housing sector. The base value of the index is 100, while the base year is 2001. Both month-to-month and yearly data are reported. It has a moderate effect on the currency markets.
- Existing home sales — It is also reported by the National Association of Realtors. The data reflect the prevailing conditions in the US housing market. Near the 25th of every month, the existing home sales data covering four major regions in the US are reported. The data, which provides the unit sales and value of existing homes, covers condos, single family houses, and co-ops. Again, this data has a moderate impact on the currency market.
- Housing starts and building permits — The Census Bureau of the US Department of Commerce publishes the housing starts and building permits data on around 16th of every month. It gives an idea of the number of plots where the housing construction has begun. The data has a moderate effect on the Forex market.
- NAHB/Wells Fargo Housing Market Index (HMI) — The index reading is based on the monthly survey of the National Association of Home Builders (NAHB). The survey is aimed to assess the single-family housing market scenario. The HMI reading can range from 0 to 100 and has a moderate impact on the currency market.
- S&P/Case-Shiller Home Price Indices — The index shows the change in the value of the residential real estate in 20 regions across the US. The data is reported by Standard & Poor’s. It has a low impact on the Forex market.
- Mortgage Applications (Percentage) — The data reflect the mortgage activity in the prior week. The data, reported by Mortgage Bankers Association (MBA), has a low impact on the currency market.
- Mortgage Rate (Percentage) — The data indicate the mortgage rate trends in the housing sector. Thus, it throws a light on the prevailing housing market conditions. The weekly data is reported by Freddie Mac and has a low impact on the currency market.
- Halifax house price index — It is a data released at the end of every month by Lloyds Bank plc. The data show the quantum of change in the real estate and housing prices in the United Kingdom. The data has low impact on the Forex market. It mainly affects the British pound.
A trader should have a good knowledge about the different kinds of housing indices and its impact on the currency market. Only then big bets can be made perfectly soon after the data, pertaining to the housing market, is released.