New Home Sales Indicator

General Definition

The “New Home Sales” is an economic indicator that measures sales of newly built homes. This is a monthly published data, which always refers to the previous month in which the Department of Commerce’s Census Bureau published the report. This report includes both the quantity and price statistics. It is considered a lagging indicator of market demand and also affect interest rates on mortgages.

It is considered as a sale of a new home any deposit or signing a contract, either in the year in which the house was built or the year after construction.

Relevance of the index

The New Home Sales is an indicator used to detect turning points in the country’s economy due to its high sensitivity to the income of consumers. Normally, when economic conditions are worsen showing a slowdown, the New Home Sales functions as a leading indicator of the recession.

When we interpret the statistics for New Home Sales, we must apply the following precautions:

  • The statistics exclude any new housing that has not been built for immediate sale. For example, in a situation in which a buyer pays a fee to a builder to build a house on a terrain that the buyer already owns this housing unit would not be included in the statistics. Other statistics of construction, such as Permits, Housing Starts and Finished Houses, include all data related to new housing construction.
  • Sales are reported as the month in which the buyer signs a sales contract or the constructor accepts a deposit. The house can be at any stage of construction.
  • Sales data are not reduced to account for contracts of sale which are cancelled by the buyer or the builder. Therefore, when there is a cancellation of this type, the house is not re-counted upon a subsequent sale to another buyer.

Effects of the indicator in the market

Because the indicator New Home Sales is about the consumption of a major asset in the U.S. such as housing, it has a significant impact on the market after publishing the data.

When the index reported a very positive data, as a significant increase in new home sales, investors can anticipate that the stock markets will go up because it advances an expansion of the economy. Generally, when consumers have confidence in the economy, are more likely to buy homes. Consequently, if the indicator shows that more houses are being bought, is revealing a clear indication that consumers are encouraged to buy and consume more in the future.

The housing market is a sector that is also related to various sectors of the economy, so it can push them one way or another. Thus, when new home sales increase, there is an increase in the number of mortgages, so it is expected that the financial sector is also growing. Other sectors such as trade appliances, television and home and decor products such as furniture, for example, are equally impacted by the evolution of sales of new homes. Also everything related to renovation, repair, etc., would be affected by the data for this indicator.

With respect to the bond market, the investor can anticipate an extremely negative scenario if the indicator of new home sales is increasing. Indeed, if the indicator shows that there is and increasing in the demand and consumption, which can result in an general increase in prices that can boost inflation . The result of economic growth and inflation will be an increase in interest rates at short or medium term, and thus a reduction of bond prices in the market and an increase in the profitability of new bonds issued.

When this indicator shows an increase in new home sales, the trader can expect a strengthening of the nation’s currency because the currency experiences a boost due to a raise in interest rates and the increase in corporate profits. For this reason, this indicator is awaited with great expectations for Forex market speculators as it often produces sharp movements up or down in the market according to its results. For example, if new home sales in the U.S. shows positive data, it is likely that there is a rise in the U.S. dollar against other currencies like the Euro for example.

 

 

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