Why existing home sales’ post-2006 record could affect bonds

Market Realist

Must-know releases that will impact US debt securities this week (Part 6 of 7)

(Continued from Part 5)

Important housing starts and existing home sales data releases

The U.S. Department of Commerce will release housing starts for January 2014 on Wednesday, February 19. Privately owned housing starts came in at a seasonally adjusted annual rate (or SAAR) of 999,000 for December 2013, down almost 10% month-on-month, but up 1.6% compared to December 2012. Analysts attributed the month-on-month slump in December to the 23% spike seen in November. What are housing starts? A housing start is registered at the start of constructing a building, primarily for residential purposes.

 

What are existing home sales?

Existing home sales are a monthly release issued by the National Association of Realtors (or NAR). Total existing home sales represent completed transactions that include single-family homes, town homes, condominiums, and co-ops. Existing home sales for January will be released on Thursday, February 21. The consensus estimate for January ranges between 4.48 million and 4.85 million units at a SAAR.

Total existing home sales were up 1%, to a or SAAR of 4.87 million in December 2013—up from 4.82 million in November but down 0.6% from the 4.90 million units we saw in December 2012. There were 5.09 million unit sales reported in 2013—9.1% higher than in 2012, and the highest level since the 6.48 million reported in 2006.

An increase in housing starts and existing home sales will imply that consumer sentiment is improving and that the economy is gaining traction. This means that, other factors remaining constant, demand for housing will push up mortgage rates, and with the Fed implementing the tapering program, there will be lesser liquidity in the financial markets. This in turn will cause interest rates to rise and bond prices to fall. A decrease in housing starts and existing home sales will imply that the economy isn’t recovering as expected and that the Fed may slow down the pace of its tapering. Other factors remaining constant, this would imply that interest rates should fall and bond prices should increase.

While housing starts and existing home sales are monthly releases, to read about two indicators issued weekly, move on to Part 7 of this series.

Continue to Part 7

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