2003. The forex trader might 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. This leads to a very important clue to trading the US dollar. When housing data show a robust uptrend, dollar strength comes along. Actually, this can be generalized to any currency. When housing data in a country are positive, the currency attracts capital. The main reason is that expectations of interest rate increases start occurring.
Table 1.1 Housing Starts 2004–2014
We can see in Table 1.1 that US housing starts have yet to fully recover from the financial collapse.
One can argue that economic data on housing activity lag too much and that a trader needs to use indicators that are more coincident with activity or even leading. Survey data should be seen as a category of sentiment information that becomes predictive in its application when an underlying trend can be discerned. A valuable source for 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.”3 A reading over 50 indicates that the majority of those surveyed have a good opinion about housing sales conditions.
For forex traders, it is always important to look for confirming data on the health of the housing industry. 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. We can see in Figure 1.3 that the Case–Shiller home price index has broken new territory and is on an upward slope. IT is still below the 2006 peak.
Figure 1.3 Case–Shiller Price Index and US Dollar Index.
How is housing recovering in other countries? Look for countries that are possibly experiencing sharp increases in housing prices (i.e., Great Britain, China).
Another way for the forex trader to get a grip on housing data is to watch equities that are housing related. For example, Lennar Homes is a leading home builder. Its stock price and earnings forecasts offer good clues regarding the direction of the housing market and by inference interest rate policies (Figure 1.4). In early 2005, Lennar Homes began to decline and its weakness was an omen about the end of interest rate increases. Interestingly, when the forex market begins to conjecture whether the Federal Reserve will raise rates in the future, the trader following Lennar Homes's stock price or another housing equity leader will be helpful in shaping an opinion about the likelihood of an interest rate increase.
Figure 1.4 Lennar Homes Collapse and Recovery Versus US Dollar Index.
Here is what the Lennar chief executive officer (CEO) said as 2007 started:
Lennar Corp. (LEN) Chief Executive Stuart Miller is seeing no signs that the deteriorating home-building market has bottomed, and Lennar expects to take land-related write-downs of between $400 million and $500 million in its fiscal fourth quarter to reflect the weak conditions.
“Market conditions continued to weaken throughout the fourth quarter, and we have not yet seen tangible evidence of a market recovery,” said Miller, in a statement. 4
Find other equities that provide insight into the housing market.
In this assignment, the trader should select the top equities, including exchange-traded funds (ETFs) that represent aspects of the housing sector, and start watching their weekly performance. When these housing equities start probing their weekly support, resistance, and trend lines, the trader will have clues as to a potential change in the housing market. Keep in mind that a strengthening housing market is bullish on the currency.
As discussed earlier, housing conditions are important when trading currencies, not just in the United States, but around the world. A shortcut in monitoring housing conditions in other countries is to read their central bank reports. Also, using Google, Baidu, Yahoo!, and similar search engines for scanning the latest housing conditions in a particular country works very well to give a trader a feel for what is going on. Traders should pay attention to the British housing situation because it directly affects currency and interest rate decisions of the Bank of England.
Great Britain and Housing
A 2014 headline in The Telegraph stated: “Why first time buyers are still piling into a hot housing market.” The subhead said, “Lending to first time buyers hits record levels, as the desire to own a home negates high prices and looming interest rate rises.”5 There in a single headline one can see the relationship between a hot housing market and interest rates.
The article goes on and cites data from an important organization in Britain, the Council of Mortgage Lenders (CML):
In June, the CML recorded the highest number of loans lent to first-time buyers since December 2007 – 28,600, an increase of 7.1pc since May and 18.7pc since June 2013.
The amount borrowed is also at levels not seen since September 2007, at £4.2bn for the month, a significant increase from May (£3.8bn) and since June last year (£3.3bn). 6
It is also very useful to read statements from the Bank of England. The following is from its June 2014 Financial Stability Report:
While housing market activity has eased recently, UK house prices have continued to rise and indicators of house price expectations point to continued strength. The share of new mortgages with high loan to income multiples has increased, which could result in more households encountering payment difficulties in the face of shocks to income and interest rates. 7
A careful reader would see some hesitation on raising interest rates, because one impact of raising rates is to reduce price inflation but another impact adversely affects the financial stability of people. It is a balancing act!
But housing fundamentals in Great Britain are red hot and won't go away that easily. Here is what the Financial Stability Report further noted:
More generally, a longer-term gap remains between the growth in demand for housing in the United Kingdom and the rate of house building. The net new supply of private housing in the United Kingdom was 110,000 in 2013 – well below the 2007 average of 180,000. 8
Forex traders who trade the GBPUSD would gain an edge by watching housing data as a clue to whether the GBPUSD is likely to rise in value.