For any economy, the real estate sector plays a significant role in signaling consumer demand, credit situation, and economic sentiment. For this reason, policymakers track real estate data that can be used to inform their monetary and fiscal policies. Furthermore, economists, financial analysts, and consumers use this data for their varying needs. It is essential for a forex trader to understand how the trends of pending home sales affect the forex market.
Understanding Pending Home Sales
Pending home sales is defined as homes that are yet to be sold. The contracts for sales have been signed, but the transaction has not been completed yet.
Note that the pending home sales can also be used as a leading indicator of existing home sales. It is leading the home sales because, generally, a real estate contract takes about a month or two to close. Thus, when the contracts are closed, pending home sales become existing home sales. It can be said to offer concrete data on future home sales and the trend in real estate. Broadly, it is a leading indicator for the real estate industry based on the fact that pending home sales data involves signed contracts in real estate.
Source: St, Louis FRED
The pending home sales data is calculated monthly. In the US, for example, pending home sales data is published by the National Association of Realtors (NAR). NAR surveys about 100 Multiple Listing Service (MLS) and large real estate brokers. The MLS is a database tracking property at different stages of the sales cycle. The sample size covers 20% of all transactions, covering up to 50% of the existing home sales. Thus, the pending home sales provide a highly accurate forecast of the existing home sales compared to other housing indicators with lower coverage.
It is important to note that not all pending home sales are closed. It is normal to have a few real estate contracts that fall through or get canceled. However, about 80% of all pending home sales are settled.
Pending home sales index (PHSI) is an index based on the pending home sales. This index is considered more accurate than the aggregate data of the pending home sales. It accounts for 20% of the home contracts that fall through. Its accuracy stems from the fact that it is based on aggregated trends in the pending home sales, thus not skewed by the fallout rate.
Using Pending Home Sales in Analysis
It is important to use the aggregate pending home sales data alongside the pending home sales index. In general, real estate data offers invaluable insight into economic growth. Let’s take an example of increasing the pending home sales index.
Since it typically takes about a month or two for the pending home sales to close, an increase in the numbers shows that households expect to have sufficient funds to complete the sale. An increasing PHSI shows that the number of sellers is increasing as well as the number of buyers. Buyers expect that in the coming months, they will be well-off enough financially to close. Similarly, sellers expecting the proceeds from the sale, are going to be better off financially. Furthermore, the process of selling a home involves realtors, lawyers, and financial advisors who get a commission on the sale for their professional services. Therefore, higher PHSI shows that the economy is expanding.
Home sales rarely involve an all-cash transaction. An increase in the pending home sales signals that households have access to cheaper financing. The cheaper home-purchase financing can only be made possible by the availability of lower interest rates. The presence of a lower interest rate in the economy generally means that more people can afford loans and lines of credit. For consumers, this increases the aggregate demand in the economy, which increases the aggregate demand. Overall, the availability of cheap loans results in economic expansion and the growth of consumer discretionary industries.
For those participating in real estate speculatively, buying and selling a property can be used as a gauge of their economic growth sentiment. When speculative buyers are increasing, they have a positive outlook for the economy and that their property’s value will increase thanks to a future increase in demand. Similarly, when a speculative seller is increasing, they can now fetch more in terms of the value of their property compared to when they bought them. Thus, the current economy is performing better than it was previously. Thus, the pending home sales data can be used to show economic prospects and compare the present economic conditions against the past.
Impact on Currency
As we have seen above, the pending home sales data and the pending home sales index can offer insights into the current economic climate compared to the past and give sentiment about the future. Although it is considered a leading indicator in the real estate sector, pending home sales is regarded as a medium-impact indicator in the forex market. Here are two ways this indicator can potentially impact the currency.
An increasing pending home sales show improving household welfare. It signals the presence of lower unemployment levels and increased aggregate demand in the economy. Furthermore, since people purchase property, expecting them to appreciate, increasing pending home sales gives a positive economic sentiment for the future, which makes the currency appreciate relative to others.
Conversely, it is negative for the currency when pending home sales are on a decline. The decline shows that macroeconomic fundamentals, such as employment, are declining. More so, it indicates a pessimistic economic outlook.
Sources of Data
In the US, the pending home sales data and the pending home sales index are published monthly by the National Association of Realtors. Trading Economics provides a detailed look into the historical pending home sales statistics in the US.
How Pending Home Sales Data Release Affects Forex Price Charts
The most recent data on pending home sales in the US was released on September 30, 2020, at 10.00 AM ET. The release can be accessed at Forex Factory. An in-depth look into the latest pending home sales and the PHSI can be accessed at the NAR website.
The screengrab below is of the monthly pending home sales from Forex Factory. To the right, is a legend that indicates the level of impact the fundamental indicator has on the USD.
As can be seen, the pending home sales data is expected to have a medium impact on the USD upon its release.
The screengrab below shows the most recent change in pending home sales. In August 2020, the US pending home sales increased by 8.8% compared to 5.9% in July. This change was better than the expected 3.1%.
Now, let’s see how this release made an impact on the Forex price charts.
EUR/USD: Before Pending Home Sales Release on September 30, 2020, Just Before 10.00 AM ET
The above 5-minute EUR/USD chart shows the pair mostly trading in a neutral pattern before the news release. Twenty minutes before the announcement, the pair adopted a sharp downtrend with candles crossing below a dropping 20-period MA.
EUR/USD: After Pending Home Sales Release on September 30, 2020, at 10.00 AM ET
After the news release, the pair formed a 5-minute ‘inverted hammer’ candle. Subsequently, the pair adopted a bullish stance as the candles crossed and formed further above the 20-period MA.
As seen above, the US’s release pending home sales data did not have any impact on the USD. Therefore, we can conclude that as a fundamental indicator, pending home sales has a negligible impact on the forex market.