The last major data point for this week comes out later today and is Existing Home Sales from the US.
As one of the most important consumer sectors in the US that is highly dependent on credit, it can give us some important insight into how the core of the economy is doing.
Over the last couple of years, the Fed’s policy of raising rates while dramatically reducing their balance sheet has led to a significant reduction of liquidity in the economy.
The most affected have been emerging markets, but that doesn’t mean the US is immune. The phenomenon has an extra impact on the housing market, considering that unemployment is at a record low, and there should be more people looking to buy homes.
What We Are Looking For
Expectations are for Existing Home Sales to come in at 5.20M, which is basically in line with last month’s 5.19M. The number did some bouncing around at the beginning of the year because of the government shutdown. But the trend has been pretty consistent: slower sales over time.
An explanation might be that as the economy improves, people are opting to buy new houses instead of used. On Tuesday we get New Home Sales which are projected to come in at 685K. This is up slightly from the 673K in the prior month. The trend has been on the upside since the end of last year.
Overall, if we combine both figures, the number of homes sold in America has dropped by about 200K since the beginning of the year. November last year also saw the peak in average mortgage rates at 4.94%. However, it fell back to the level it was near the beginning of the Fed’s hiking cycle, registering 3.84% yesterday.
Given population growth, the relative robustness of the economy, and low unemployment, we ought to see home sales increasing and upward pressure on yields.
The median home price in the US according to the Fed dropped 4.7% to $307.7K during the first quarter. This is not to be confused with the average house price, which in April contracted for the first time in seven years according to Zillow.
The Market is Cyclical
We haven’t had that combination of factors since before the subprime crisis in 2007. Typically average house prices in the US rise around 7% annually (often tracking somewhere around double the inflation rate).
Is the housing market running out of steam? And what does this mean for the finance industry, where mortgage delinquencies are still higher than credit card NPAs?
It’s not all concerning news, of course. The US is by far not in the same situation it was 12 years ago. While housing inventories remain high, they also peaked in November, and have since broadly been declining. In the meantime, housing permits and starts (which were reported last Tuesday) have remained largely consistent.
Consumer Demand is Key
The important question is whether mortgage yields and the housing market are being driven by structural issues, or whether it’s because people are holding off buying for some reason. And if it’s the latter case, what reason would lead Americans to forego buying homes?
Around the time in the drop in home sales, there were quite a lot of news articles worrying about the housing market, but they have since gone silent.
In the short term, the housing condition is likely not to have a major impact on the currency market. And maybe we are having some anomalous data points which will smooth out as we get firm data at the close of the first quarter.
But, with the Fed leaving the door open for a cut this year, yields might be expected to go down. If the increased access to cheaper credit doesn’t motivate homebuyers, we might want to keep an eye on this.