US Home Sales and Their Effect on the Forex Markets
Both existing and new-home sales in the United States have a considerable influence over how the Forex market behaves. The housing and mortgage sectors took a hard hit during the last recession and are yet to recover in full from its devastating impact. On top of that, they are influenced by the country’s interest policies, a factor that is broadly believed to have contributed to the decline of the United States’ economic growth in recent years. So how does this affect the foreign exchange markets?
Let’s consider the Existing Home Sales Report by the US Census Bureau, which keeps track of the annualized number of existing residential homes that were sold during any given month. This data helps measure the strength of the housing market in the United States. It also serves as an important indicator of the current strength of the country’s economy and particularly, of the strength of the local currency, the USD.
The Bearish and Bullish Behavior of the USD Based on Property Sales Reports
US home sales reports can be implemented when making predictions about the market behavior of the US dollar. When the annualized number of sold existing residential properties exceeds the expectations, the USD currency may exhibit bullish behavior. Its price might go up due to the higher levels of confidence in the housing market, which, in turn, leads to an increase in the number of potential investors.
The opposite is true whenever a decline in the annualized number of sold existing residential properties is reported. If the results are below expectations, this might hurt the USD value and cause the currency to behave bearishly, i.e. a decline in the USD price may be expected.
Another important report released by the Census Bureau is the one that gauges the annualized number of new single-family residential properties that are sold or put up for sale. The report is released on a monthly basis and measures the number of new homes sold within the previous month. It typically has a more pronounced effect when released before the Existing Home Sales report due to the strong correlation between the two.
With that in mind, its readings influence the USD currency prices similarly to those of the Existing Home Sales Report. Whenever the readings exceed the forecasts and sales data, this immediately reflects onto the USD and causes it to behave bullishly. And vice versa, if the opposite occurs and the figures are below expectation, this should be interpreted as bearish for the US dollar.
Currency Exchange Rates and Property Prices
It becomes evident there is a pronounced correlation between the exchange rates of the USD and the current pricing of housing properties. This is due to the fact the fluctuations in the foreign exchange rates result from a broad spectrum of economic factors, including consumer confidence, changes in the gross domestic product of a country, its monetary policies, and inflation. In turn, the changes in the foreign exchange rates have a considerable impact on the real estate markets. One interesting phenomenon is to be observed in this respect.
Whenever the US dollar strengthens, it tends to sell at a higher price against weaker currencies. This often will lead to a jump in property prices. Thus, if a foreigner wants to buy a home in the United States, they most likely will have to spend more of their local currency to conduct the purchase in USD.
Because of this, potential foreign investors in the US real estate market are recommended to keep a close watch on the Forex markets. They should wait it out until their own currency strengthens sufficiently against the USD. This is the best time to make a home purchase in the United States because you will have to use less of your home currency to execute the purchase in USD. The strength of a foreign investor’s home currency in relation to the dollar determines the price of the property they want to buy in the US.
The Effect of a Slowing Property Market on the Currency
Since it affects currencies, the housing market data is used for fundamental analysis. A significant decline in home sales in the US can result in what is known as a balance-sheet recession. The latter may have a pronounced negative effect on the local economy. This phenomenon is observed whenever there are significant debts in the private sector and people are forced to save money rather than spend or invest it.
A snowball effect is at hand since this decreased level of spending can cause a slowdown in the country’s rates of economic growth. It makes sense that a balance-sheet recession would also negatively affect the exchange prices of the USD on the Forex markets. The value of the USD will drop against the prices of foreign currencies.
Here is an example of how this works. The United States enters a household balance-sheet recession, which leads to the dollar’s depreciation against the EUR. If a hypothetical US investor is looking to buy EUR with USD, they will have to spend more of their home currency for the purchase. The same goes if a US citizen wants to invest in a housing property in Europe while their own country is amid a recession.
They will need more USD to pay the foreign property’s price in EUR. All of this occurs because the economy is not as prosperous during a recession and is, therefore, less attractive to foreign exchange investors. In turn, this would lead to less demand for the country’s domestic currency on the Forex markets.