THE ROLE OF HOUSING IN FOREX PRICE MOVEMENTS

Fundamentally, however, one of the most important categories of economic data around
the world, which is sensitive to interest rate changes, is housing data. The housing sector
in the United States, as well as other nations, provides a major share of wealth, consumer
spending, and job creation. Recent years have seen an international housing boom, with
prices growing at more than 10 percent per year in many countries. For example, Ireland
grew at 15 percent in 2006; Spain’s growth actually slowed down to 13 percent. Canada,
Norway, and Sweden shared more than 10 percent growth. The United States, in the face
of a slowdown, saw prices up 7 percent. This means that the value of homes around the
world has doubled in the past 10 years, and as a result the increased wealth has fueled
economic growth and consumer purchase.
Closely watched are data releases that relate to housing activity. Some of the main
data releases track:
The level of unsold homes
Mortgage loan applications
New and existing home sales
Single-family housing permits
Housing prices
Forex traders’ expectations of the future direction of interest rates are significantly
affected by housing data because, for example, weak housing leads to expectations of a
slowdown on consumption. The economic reasoning is that consumers start seeing a decline
in housing values and restrain their consumer spending. One of the most important
factors related to housing market strength in recent years has been mortgage equity withdrawals
(MEWs). As home prices have increased around the world, consumers take out
loans against their mortgages, which stimulates consumption. During periods of housing
booms, MEWs rise. MEWs have been, in fact, calculated to contribute to the growth
of gross domestic product (GDP). Figure 1.2 shows that MEWs have reached nearly 6
percent of U.S. GDP. However, if MEWs slow down, this can portend a decline in consumption
and a slowdown in the economy. If and when a slowdown in MEWs occurs,
central bankers view it as lessening the likelihood of an interest rate increase. Damon
Darlin wrote in the New York Times (“YOUR MONEY; Mortgage Lesson No. 1: Home Is
Not a Piggy Bank,” November 4, 2006):

have fun. They may very well have used it to buy another house or not spent it at
all, but added it to savings. Economists really are not certain.
“I guess it is one of those mysteries,” said Christopher D. Carroll, an economics
professor at Johns Hopkins University. “I don’t think anyone knows what
the answer is.”
Nevertheless, mortgage equity withdrawal is closely watched as an indicator
of the general economy because, Mr. Carroll said, “there is a lot of concern
that a cooling housing market could result in a sharp fallback in consumer
spending.”
A recent paper that Mr. Carroll helped write contends that for every $1,000
change in housing wealth there is an immediate propensity to consume about $20
more. The wealth effect, as the phenomenon is called, is twice as high for housing
wealth as it is for stock wealth, Mr. Carroll and his associates said.
At the end of 2006, the data on MEWs showed a large decline from the year before
in the United States. This was an early indicator of a slowdown in the U.S. economy
because it is estimated that two-thirds of the money from MEWs goes for consumption.
So the forex trader seeing signs of an MEW slowdown can get ready for its effect to take
place months in advance.
The importance of housing data as a factor in shaping currency moves has been
highlighted further by the events relating to subprime mortgages in the United States.
These mortgages were issued during the housing boom/bubble, without the traditional
credit requirements. Economic forces ultimately worked to create mortgage delinquencies
and a collapse in this market. For the forex trader it is a clear case where fundamentals
affect the dollar. More housing weakness translates to weaker consumer demand
and that translates to lowering the probability of interest rate increases. It’s difficult
to be bullish on the dollar in this environment. However, if the housing market starts

recovering, the pressures to increase interest rates (or not decrease them) will help attract
dollar buyers.


By ABE COFNAS