What is important to realize about
fundamental analysis of housing sector data is that the trader can identify
pending changes in trends and direction of the economy. Of course, it is true
that forex prices move all the time in reaction to news and the like, but
economies don’t change direction overnight. By understanding housing data, one
can develop a fundamental viewpoint that leads to trading strategies before
technical price patterns reflect the change.
For example, in Table 1.1 we see data on
U.S. new housing starts. The year 2005 was a year of a high level of housing
starts peaking in February at 2.2 million units and then testing that peak in
January 2006 (see Figure 1.2). After January 2006, the data showed a decline,
and by August 2006, the decline in housing starts reached levels of 2003. The forex
trader may not have picked the start of the slump by looking at this kind of
data, but clearly would have seen that right after the start of 2006 new home
starts were in a period of weakening. When housing starts reached a peak and
then started declining, it was difficult to be pro-dollar. Although housing
data showed a slump, the Federal Reserve didn’t stop the increase in rates
until August 2006. In this case the new housing start data was a very reliable
leading indicator that interest rates would not increase.
HOUSING
SENTIMENT INDICATORS
One can argue that economic data on housing
activity is lagging and that a trader needs to find indicators that are more
coincident with activity or even leading. A valuable sourcefor assessing
housing activity in the United States is the survey releases of the National Association
of Housing Builders (NAHB). According to the NAHB, “The Housing Market Index
(HMI) is based on a monthly survey of NAHB members designed to take the pulse.
of
the housing industry, especially the single-family industry. The survey asks
respondents to rate general economic and housing market conditions.”
By looking at the HMI data for 2005 and 2006 we
can discern an increasing pessimism on the health of the housing market (see
Tables 1.2 and 1.3). The survey results in the summer of 2005 were at a peak on
all HMI component measures. The Federal Reserve stopped increasing rates in
August 2006, reflecting their judgment that the economy didn’t require more
rate increases. Using the HMI index, the forex trader saw a
significant
weakening in the housing market, which was an omen that increases in rates were
increasingly not likely. At the end of 2006, the HMI survey shows that the
previous rate of decline in housing starts was slowing down. This can be
interpreted as possible bottoming out of the housing market. Using this data,
those traders expecting an interest rate decrease would have to reconsider their
confidence in a rate cut.
The importance of housing data as an indicator
for traders is reflected in the fact that new sources of data on housing are
being developed for investors. One of the more recent sources is the Standard
& Poor’s (S&P)/Case-Shiller home price index. It is a benchmark measure
for housing prices. It tracks the value of single-family homes in the United States.
Twenty metropolitan areas are tracked, and the index is measured monthly.
The last
Tuesday of each month at 9 A.M. is the release time of the announcement.
Traders looking for leading indicators of a housing recovery will likely see it
in increases in housing prices tracked by this monthly index, posted at www.indices.standardandpoors.com.
Detailed housing data can also be found at www.macromarkets.com
.
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