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HOUSING DATA AS A LEADING INDICATOR

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 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

TABLE 1.1 Number of New Privately Owned Housing Units Started (Seasonally Adjusted)

Year

New Privately Owned Housing Starts (Unit = Thousands)

Year

New Privately Owned Housing Starts (Unit = Thousands)

Year

New Privately Owned Housing Starts (Unit = Thousands)

Jan-00

1636

Jun-02

1717

Nov-04

1782

Feb-00

1737

Jul-02

1655

Dec-04

2042

Mar-00

1604

Aug-02

1633

Jan-05

2137

Apr-00

1626

Sep-02

1804

Feb-05

2213

May-00

1575

Oct-02

1648

Mar-05

1856

Jun-00

1559

Nov-02

1753

Apr-05

2079

Jul-00

1463

Dec-02

1788

May-05

2034

Aug-00

1541

Jan-03

1853

Jun-05

2078

Sep-00

1507

Feb-03

1629

Jul-05

2070

Oct-00

1549

Mar-03

1726

Aug-05

2075

Nov-00

1551

Apr-03

1643

Sep-05

2158

Dec-00

1532

May-03

1751

Oct-05

2046

Jan-01

1600

Jun-03

1867

Nov-05

2131

Feb-01

1625

Jul-03

1897

Dec-05

2002

Mar-01

1590

Aug-03

1833

Jan-06

2265

Apr-01

1649

Sep-03

1939

Feb-06

2132

May-01

1605

Oct-03

1967

Mar-06

1972

Jun-01

1636

Nov-03

2083

Apr-06

1832

Jul-01

1670

Dec-03

2057

May-06

1953

Aug-01

1567

Jan-04

1911

Jun-06

1833

Sep-01

1562

Feb-04

1846

Jul-06

1760

Oct-01

1540

Mar-04

1998

Aug-06

1659

Nov-01

1602

Apr-04

2003

Sep-06

1724

Dec-01

1568

May-04

1981

Oct-06

1478

Jan-02

1698

Jun-04

1828

Nov-06

1565

Feb-02

1829

Jul-04

2002

Dec-06

1633

Mar-02

1642

Aug-04

2024

Jan-07

1565

Apr-02

1592

Sep-04

1905

Feb-07

1525

May-02

1764

Oct-04

2072

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

TABLE 1.2 Housing Market Index (Seasonally Adjusted)

2005

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

70

72

70

67

65

68

61

57

57

56

2006

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

54

51

46

42

39

33

30

31

33

32

Source: National Association of Housing Builders.

Source: National Association of Housing Builders.

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

TABLE 1.3 Housing Market Index Components (Seasonally Adjusted)

2005

May Jun Jul Aug

Sep

Oct

Nov

Dec

Jan

Feb

Single-Family Sales: Present

76 77 76 73

72

74

67

64

62

61

Single-Family Sales: Next 6 Months

77 80 77 77

70

73

65

65

66

64

Traffic of Prospective Buyers

53 55 55 50

49

51

46

40

41

40

2006

May Jun Jul Aug

Sep

Oct

Nov

Dec

Jan

Feb

Single-Family Sales: Present

59 55 50 47

43

37

32

32

33

33

Single-Family Sales: Next 6 Months

62 59 55 51

46

41

37

42

45

48

Traffic of Prospective Buyers

40 39 33 29

27

22

22

23

26

23

Source: National Association of Housing Builders.

Source: National Association of Housing Builders.

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.

ALSO WATCH HOUSING EQUITY SECTOR STOCKS

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 earning forecasts offer good clues regarding the direction of the housing market and by inference interest rate policies (Figure 1.3). In April 2006, Lennar homes broke down below its support at $55 per share. Lennar Homes' 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.

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FIGURE 1.3 Lennar Homes Trying To Recover. Chart courtesy of Aspen Graphics, www.aspenres.com.

FIGURE 1.3 Lennar Homes Trying To Recover. Chart courtesy of Aspen Graphics, www.aspenres.com.

Here is what the Lennar chief executive officer (CEO) said as 2007 started (Wall Street Journal, March 1, 2007):

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.

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