When you choose to look at real estate as forex trading indicator, you need to focus on New Residential Construction Report.
Why is housing data important?
During periods of strong economic activity, the housing market contributes to nearly 20% of GDP. This is particularly true in the case of the USA. Heightened construction activity has a positive effect on the GDP in two ways. Naturally, the first one is the increase in GDP because of a rise in the purchase of homes. Home purchase usually leads to a demand for housing services and ultimately an increase in the consumer spending. In the US, residential investment contributes to 5% of GDP. The residential investment drives consumer spending. This contributes between 12% and 15% of the GDP of the US. For example, in 2021, the construction activity contributed about $955 billion or 4% of the GDP of US. In 2006, when the housing market was at its peak, the construction activity contributed $1.195 trillion or 8.9% of the US GDP at that time. Thus, a decline in the housing market will have a huge negative effect on the overall procurement and manufacturing industry. It should be noted that real estate construction is labor intensive. Thus, a collapse in the housing market will eventually lead to a surge in the unemployment rate.
What are Housing Starts?
Housing Starts refers to those properties whose housing construction activity has started on the foundations. It means only those are counted for which the building activity has crossed beyond the beginning foundation or footing laying stage. Houses for which only pillars and foundations are laid and stopped are not counted in.
This report is issued monthly by the Department of Housing in USA alongside with the Census Bureau. Within the report there is data from surveys regarding home building.
The following 3 characteristics are examined:
1. Amount of new housing constructions (“Housing Starts”)
2. Number of building licenses issued
3. Amount of house completions
The given data is sorted by geographical sectors (north, east, south, west) to show the regional variations.
Real Estate – Economic Indicator
In order to calculate US Leading Index, the data from building licenses and new housing constructions are used as the leading indicators. The growth in the construction industry shows the growth in business cycle.
In forex trading, real estate indicators is needed to calculate other indicators that are based on consumer statistics. For example, with a purchase of a new home, there are other expenses such as gardening supplies, furniture, kitchen appliances, insurance etc.
In case Federal Reserve increases interest rates, the housing market usually slows down a notch due to mortgage rates that rise accordingly. This consequently slows down the new housing construction and in some cases, stops the new addition to real estate all together.
In order to see a clear trend in real estate, it is important to analyze the patterns formed. Do not focus on specific monthly numbers because the trend won’t be obvious from those. Keep in mind that typically this report doesn’t make the market volatile, however it helps to focus on other consumer-based indicators.
For those of us highly interested in the development in real-estate, this indicator can be very useful in forex trading. Since the survey covers data from almost the whole US, it gives pretty clear picture to identify business cycles.
Real-estate charts show the health of the local housing market. Home sales and prices tend to go up or down based on yearly seasons, however the overall long-term charts can uncover trends compared to previous year.
Housing Starts report is usually released around 17th of each month by US Census Bureau and covers previous month’s data. Housing starts is best used as a business cycle indicator and a tool for forex traders to understand real estate markets.
Impact on Currency
An increase in the Housing Starts is reflective of the present current economic conditions. A strong economy would have higher numbers in the housing reports relative to a weaker economy where people would shy away from purchasing single-family homes.
An increase in housing starts reports also implies that demand for construction materials, hiring of labor forces, loans, and other construction-related activities has risen, and the economy is actively generating revenue than before, which is good for the nation and its currency.
Below is a snapshot of the Housing Starts historical report taken from the FRED official website, which shows the economic indicator’s correlation with the national economy’s growth. During times of recession (shaded bars in the background), there have been significant plunges in the numbers and vice versa. The below graph proves the importance of Housing numbers as an indicator of the economy’s performance in our fundamental analysis.
Other Housing Market Indicators
Analysts use the Building Permits data in conjunction with other prominent housing market indicators such as Housing Starts, Construction Spending, New Home Sales, and Existing Home Sales. A harmonised analysis allows drawing conclusions on the growth or stagnation of the housing market.
- Housing Starts:
The number of new projects which commenced the actual construction process. - Construction Spending:
The amount of real spending in all construction projects in the period. - New Home Sales:
The volume of the first sales of newly constructed residential units. - Existing Home Sales:
The volume of all residential unit sales except new homes.
Key Building Permits Reports Around the World
U.S.
- Region: North America
- Date of release: Monthly, Yearly
- Issuing Agency: The U.S. Census Bureau
- Affected Assets: USD; construction-related stocks and commodities; bonds; US30, US500, US_Tech 100
EU
- Region: Europe
- Date of release: Monthly, Quarterly, Yearly
- Issuing Agency: Eurostat
- Affected Assets: EUR; construction-related European stocks; DAX 30, CAC 40; government bonds of EU-members
Canada
- Region: North America
- Date of release: Monthly, Yearly
- Issuing Agency: Statistics Canada
- Affected Assets: CAD; construction-related Canadian stocks; S&P/TSX; Canada Marketable Bonds;
Japan
- Region: Asia
- Date of release: Monthly, Yearly
- Issuing Agency: Statistics Bureau of Japan
- Affected Assets: JPY; construction-related Japanese stocks; Nikkei 225; Japan government bonds
Australia
- Region: Oceania, Asia
- Date of release: Monthly, Yearly
- Issuing Agency: Australian Bureau of Statistics
- Affected Assets: AUD, NZD; construction-related Australian and New Zealand stocks and bonds;
