Housing indicators may suggest a soft landing
Source: www.tradingview.com
The series on the left is the Housing Market Index (HMI) and the right shows the Pending Home Sales Index. Both indexes have crossed above their 3-month simple moving average and their RSIs are heading upwards towards the bullish side of 50.
The HMI polls the views of homebuilders, and its uptick is encouraging. It is also a timely economic series, based on responses received in the first ten days of the month.
A pending home sale happens when the seller accepts a sales contract on a property and is recorded. A large proportion (but not all) of pending sales are closed.
In order for the soft landing scenario to gain more credibility, there needs to be follow through on these series.
A concern remains around housing starts
Source: www.tradingview.com
The current housing starts index is weak. It is below its 3-month moving average and heading down. Its RSI is on the bearish side of 50.
The housing starts series is a good barometer for economic activity and company earnings. It refers to the number of residential units where construction has started. It is a closely watched series as it is a hub of economic activity.
An increase in housing starts ripples throughout the economy. It means that more jobs will be available. Sales for concrete and building materials pick up, which leads to other positive ripple effects.
After the housing project is completed, new owners buy furniture and rates and taxes mean more money in the coffers for local government for spending projects.
Clearly, it is a sector that is important for maintenance of a robust economy. That the series is so weak now is indeed a worrying sign.
However, there is an interesting relationship between the HMI and housing starts:
Source: www.tradingview.com
The HMI (black line) is positively correlated with housing starts (red line). The correlation coefficient is currently at 86%. We continue to watch the HMI series with interest. Any weakness that is suggested by the series is likely to flow through to housing starts. This will ripple out to the rest of the economy, making the soft landing scenario more difficult. However, HMI's current uptick may lead to an uptick in the housing starts. A strength here will boost the soft-landing scenario.
Russell Shor
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.
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