Should We Be Worried About The Recent Housing Data?

Over the past week, we got flooded with a ton of housing data reports. Let’s take a quick look at some of the data shall we?

First building permits for February came out better-than-expected, printing an annualized rate of 720,000. This was not only better than forecast, but a nice improvement from the previous month’s pace of 680,000.

Sadly, this was the only piece of report that beat forecasts, as all other data came in at par or weaker than projected.

Housing starts dipped by 10,000, falling to 700,000, while existing and new home sales printed annualized paces of 4.59 million and 313,000. For February, it was expected that these two metrics would print at 4.61 million and 326,000, respectively.

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Meanwhile, the Case Schiller Index showed declines in home prices of 3.8% this past 2011, which was just slightly better than the decline of 4.1% we saw in 2010. The sad part is that analysts are expecting a contraction of anywhere between 3.3% and 4.5% this year.

This goes to show that while companies are filing permits to begin construction, actual construction and sales remain stagnant. This is probably due to inconsistent demand as consumers aren’t quite ready to pay down payments on big ticket items.

Is this a major cause for concern? More specifically, why should traders pay attention to housing data?

We need to pay attention to the housing market because it reflects the health of the economy. If we don’t keep tabs on it, we could see a repeat of what happened in the 2008 financial crisis. Remember that the global recession essentially began with the collapse of the U.S. housing market.

When house prices are rising – signaling that the sector is doing well – there is more money for homeowners who are looking to sell their houses. People who take out loans against their mortgages will also have more leeway to spend or to begin business. Consequently, this could boost consumption, which is regarded by many as the main driver of economic growth.

On the contrary, when house prices are falling, not only is there less money for consumption, but there are less jobs (via construction, sales, etc…) and it could only be a matter of time until we see the economy slow to a crawl.

It is for this precise reason that traders should pay extra close attention to reports on the housing market, especially since it seems like we’re seeing a shift back to fundamentals. A couple of weeks ago, the dollar rallied on the back of positive economic reports but got sold-off earlier this week when Bernanke expressed his dovish sentiments about QE3 being a possibility for the U.S. economy.

The Fed head honcho has already noted the weakness in the housing sector. He said that despite the central bank’s actions, longer-term rates haven’t really gone down.

This could be bad news for dollar bulls as further weakness in the housing sector could give the Fed one more reason to consider another round of quantitative easing and extend the period of low rates. Yikes!

So, you tell me, should we be concerned about the housing market?

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