One of the reasons why the U.S. stock market rallied last Friday was the incredible Existing Home Sales release. It grew by 24.6%, a strong comeback of the housing market after the decline generated by the coronavirus crisis.
The sector is a very important one for any economy. That is particularly true in the United States, where traders and investors have an entire array of economic data for the sector – Existing Home Sales, Pending Home Sales, Building Permits, and so on.
But why is the housing market so important? Moreover, why does a V-shape chart like the one we see below is good news for the overall economic activity in a country?
The Housing Sector – A Leading Indicator of Economic Health
Any indicator from the housing sector is a leading indicator of economic health. It signals a potential bottoming of the business cycle and the potential for further growth ahead.
The Fed did its job. By slashing the federal funds rate, it made mortgage rates more attractive across the country. Suddenly, refinancing a mortgage is possible, and, for those believing that this is the bottom when it comes to interest rates, better terms are difficult to find in the future.
This is exactly the point for lower interest rates – to stimulate economic growth. Commercial banks will pump the money into the real economy instead of parking them at the Fed for interest. This way, jobs are created, the velocity of money increases, and so on. In this case, banks sold more mortgages as conditions became more attractive.
The housing sector also triggers collateral, ripple effects. For example, it is often the case that the new owner of a house will renovate it – new painting, furniture, hire a local company to do some work. All in all, the regional economic activity picks up, as small and medium businesses benefit every time a house is sold.
Coming back to the stock market, yesterday, the S&P500 closed at all-time highs. However on Friday, the USD appreciated, trying to diverge from the stock market. That was the case up until the housing data came out. From that moment on, the equity market bounced, the USD’s appreciation stalled, and the greenback recovered the lost ground yesterday.
It reflects the importance of the housing market, as good data from the sector is enough to reverse strong market trends.