The economy and the fixed income markets: Must-know latest updates

Part 7
The economy and the fixed income markets: Must-know latest updates (Part 7 of 11)

How did higher home prices manage to suppress the new home sales?

Buying a home

Buying a home is one of the biggest investment decisions. Many socioeconomic factors including homes prices, employment level, and personal consumption level impact the home sales. To buy a home, consumers need to feel comfortable and confident about their own financial position. A new home sales trend not only provides information on the health of the economy, but also gives rise to multiplier effect through the economy. Investors and analysts across the stock (SPY) and bond (BND) market, watch home sales data carefully to gauge the direction in consumer spending. The new home sales data released last week suggest decline at an annual rate of 440,000 units versus a revised 455,000 units in January. However, much of the decline has been associated with the weak supply in the market rather than the demand. With rise in the home prices, as indicated in the Parts 5 and 6, the expectation is that the home sales market would revive with the increase in the home construction activity.

New Home salesEnlarge Graph

Increase in the home sales activity not only impacts the profitability of the homebuilder and realtors like K.B. Home (KBH) and Lennar Corporation (LEN), but also benefits consumer discretionary industry reflected in Consumer Discretionary Select Sector SPDR ETF (XLY). Once the home is sold, consumers may purchase other discretionary items such as refrigerators, washers, dryers, and furniture just to name a few, leading to multiplier effect across the economy.

Other things being constant, an increase in the home sales uplifts the performance of stock markets (SPY), whereas, for the bond market (BND), the inflation remains a concern. If inflation goes overboard, then interest rates rise and pull the bond prices down.

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