The recently released US Pending Home Sales result has been generating a small degree of optimism towards the US economy. With more households willing to front up and purchase one of the most expensive items they are ever likely to own, why wouldn’t we take it as a sign of consumer confidence? When I look at the figure I don’t see optimistic consumers with greater disposable incomes to spend. I see worried US investors that need to sink their USD into a hard ‘safe’ asset as they fear for the value of their bank balance.
Historically, an increase in US Pending Home Sales is indicative of a bullish trend for the USD. Large deviations from expected results should generate a significant degree of buying or selling pressure depending on what the outcome of the index is. A 3.5% increase, as opposed to the predicted 1.1% increase, should be giving a solid signal that the US economy is improving. Long positions on the USD should predominate when the expectation is so much less than the actual result. The Pending Home Sales results might even be giving some credence to the recent Fed member announcements.
Unfortunately, I feel that increased home sales are indicative of pessimism towards the US economy. The key difference for me is that home sales share much of the same psychology as gold ownership. Like gold, homes are considered a safe investment. Therefore, when going into a period of economic uncertainty homes can become very attractive. Homebuyers still believe they can’t really lose in the housing market, and this belief seems to hold when going into a recession or while capitalizing on an expansion. Of course, history has proven that neither gold nor home ownership are immune from the effects of major economic crises. One only has to look back to the most recent global financial crisis to see how increased homeownership doesn’t exactly preclude economic crashes.
Comparing the recent Pending Home Sales result with the simultaneously released Personal Spending figures should give pause for thought. In the same period that saw the large increase in Pending Home Sales, we saw a negligible increase in personal spending. The latest Personal Spending result came in at only a 0.1% increase on last month, the result challenging the case that the US economy is truly improving. US Personal Income also only increased 0.2% on last month. It would then seem that the increased investment in homes is not being generated by additional incomes or consumption. More likely is that US residents are scrambling towards the perceived safety of homeownership in the face of economic uncertainty around US growth and inflation.
In isolation, any economic indicator can be seen as lacking, but Pending Home Sales proves to be lacking more than others. Interpreting excellent results as a fundamental improvement in the economy oversimplifies the psychology of home ownership. If you view homes as a means of wealth storage, the positive result can be interpreted very differently. It pays to look at changes in Pending Home Sales context rather than as a signal of improving or worsening conditions.