Unexpected Forex Implications Of US Housing Situation

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Over the next couple of days, we will be getting a series of monthly data from the US housing market. This data comes back into focus after the latest CPI reading, which is why it could have some influence on the dollar.

Remember that the next CPI data release is the day before the FOMC announces its policy decision. That means the markets will have little time to adjust expectations based on the data. So, any components that can give some insight into what will happen with prices could have an outsized impact on the markets.

Why it matters now

The last CPI figure came in well below expectations, both on the headline and core reading. The latter is the most important for the markets because that’s what’s tracked by the Fed. The thing is most of that surprise was due to a drop in the cost of shelter, which basically means lower rental prices. Rent costs are part of the core inflation rate; since that only excludes food and energy costs.

Apparently, analysts haven’t been paying enough attention to what’s been going on in the US housing industry to adequately forecast what would happen with CPI. This could be an issue beyond inflation, since housing is the largest single industry in the US, consuming the rawest materials. A slump in the housing industry, and the potential effects on the broader economy are illustrated by the 2008 subprime crisis.

What happened and where are we going?

As we talked about back in June, rising interest rates make it harder for people to afford to buy a house, which in turn puts downward pressure on house prices. Major housing firms have already reported that completions are down, and they expect to sell less in the coming months. Lower housing costs translate into lower rental prices. This is on top of a loss in disposable income keeping people from moving into higher-cost rent, or looking for ways to lower their out-of-pocket expenses by, for example, sharing an apartment.

The latest data on the housing market is expected to show a continuation of the trend. October US housing starts are expected to slip to 1.41M from 1.44M prior. Building permits are expected to fall -6.3% compared to the prior month. What this means is fewer new houses are coming onto the market to replace houses that have gotten too old. In the short term, this is bad for homebuilders; but the growing home deficit could imply a boom for the industry after rates come down in the long term.

The more worrying sign

More concerning is tomorrow’s data on existing home sales, which represents a much larger number of buildings. New home building is more adjustable to market trends and targets areas of growth. It doesn’t necessarily represent trends in rent, for example, which is important for monetary policy projections.

Existing home sales are expected to come in negative for the 9th consecutive month, showing a decrease of 8%. That would put home sales at 4.4M last month, compared to 4.7M in August.

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