Is the US housing market a bit frothy?

Home sales seem to be slowing while prices are rising. At some point, prices will need to decline to induce more demand

Stocks (1)

Buying and selling your house may soon get a little tougher.  Last week, Existing Homes Sales for May were released.  The print was 5.8 million, the lowest reading in 11 months, and it’s approaching pre-pandemic levels.  New Homes Sales for May were also released last week.  The print was 769,000 (annualized), the lowest reading in over 1 year.  Pending home sales for May released Wednesday showed a 13.1% YoY increase vs +25% expected. This was the lowest reading since July 2020.  (However, we should note that the MoM print was +8% vs -2% expected.  With lower sales, and higher pending sales, one could speculate that next months pending home sales will be lower.)

The S&P CoreLogic Case-Schiller 20-city home price index was released on Tuesday.  The index rose 14.9% in April, and the March print was revised higher to 13.4%.  This was the largest annual increase in 21 years! 

What are economic indicators?

Although housing sales are nearing pre-pandemic levels, price levels are much higher due to low interest rates.  However, some homebuyers, especially first-time house buyers, are being priced out of the market.  As we can see from the data, housing sales have already begun to slow.  At some point prices will have to be lowered, as demand won’t be there. This is especially true at lower price points. This seems to be representative of many countries around the world, and central banks have noticed.  Some have explicitly mentioned they are concerned about the housing prices.   In statements by US Fed officials, some have mentioned that one of the first things the Fed can do once they begin tapering is to reduce the amount of MBS purchases.  The Fed is currently buying $40 billion per month in MBS (as part of the $120 billion per month in total bond purchases).

Everything you need to know about the Federal Reserve

We’ve been paying a lot of attention to the DXY lately, especially since the last FOMC meeting on June 16th.  On a 240-minute timeframe, price broke higher from a descending wedge in early June.  However, it wasn’t until the FOMC meeting on June 16th that the index began to move aggressively.  Due to the hawkish-tilt from the FOMC, the US Dollar Index began moving higher in earnest to the 61.8% Fibonacci retracement level from the March 31st highs to the May 25th lows, near 92.00.  The index pulled back in a pennant formation.  Notice how the RSI was in overbought territory near 85 before price pulled back. On June 25, DXY moved out of the pennant and began moving towards its target. The target for a pennant is the length of the pennant pole added to the breakout point of the pennant, which points to 93.37, just pips shy of the target for the retracement of the wedge, which is 93.44.

Source: Tradingview, City Index

If traders wish to trade the DXY but don’t have access to it,  2 alternatives are USD/CHF and USD/SEK, which have high positive correlations to the DXY. Below are 2 recent articles which show these correlations:

DXY isn’t a currency pair, but USD/CHF is!

Sweden’s in trouble, and it has nothing to do with Euro 2020

Home sales seem to be slowing while prices are rising.  At some point (probably sooner than later), prices will need to decline to induce more demand.  Once the Fed begins tapering, MBS purchases may be the first to go, which would raise rates in the mortgage arena, and therefore, cause prices to come down.

Learn more about forex trading opportunities.


Disclaimer

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.