In our last lesson we looked at the Consumer Price Index an indicator which is designed to represent the level of inflation in the economy. In this lesson we are going to look at Existing Home Sales and what this tells us about the overall health of the economy and therefore the market in general.
Released at 8:30am EST in the fourth week of the month, the existing home sales report is designed to cover the number of existing homes closed during the previous month, and the average sales prices by region of the country.
There are 3 important numbers released in the Existing Home Sales Report which are:
- Aggregate number of homes sold
- Median Selling Prices
- Months Supply which represents that inventory of unsold homes on the market and gives insight into what to expect in the future from the first two numbers.
Like most indicators the number is provided raw and with seasonal adjustments to account for changes in the weather which can have a large effect on the number of homes sold in a particular month.
In addition to the obvious importance to the stock of homebuilders, home supply stores etc the existing home sales number is also considered a leading economic indicator, as increases and decreases in the number of homes sold tend to lead economic activity in general by several months.
When housing sales are strong and prices are rising homeowners which represent a large part of the economy show increases in equity in their houses which can be spent through home equity loans or used to upgrade to a larger home, all important drivers of economic activity.
As with the other leading economic indicators we have looked at, this indicator will be looked at even more closely when the economy is thought to be at a turning point, and market volatility can be particular large as a result.
Also, as with the other indicators we are looking at the best way to learn how to anticipate market reaction under different scenarios is to follow several of the releases in real time. With this in mind I will be posting a discussion piece in the comments section of this lesson on InformedTrades.com after the next few releases so we can follow and get to know the release in real time.
That concludes our lesson. In our next lesson we are going to look at one final leading economic indicator which gauges the consumer’s opinion on how the economy is called the Consumer Confidence Index so we hope to see you in that lesson.