New home sales only make up a minority of total residential property sales, but data on new home sales carries extra weight because of the positive economy activity associated with it. An existing home sale means that someone is selling and someone is buying, while a new home sale means that someone (or a family) is creating new demand for property. Furthermore, since many new homes are sold before they’ve even been built, a datapoint that shows a new home has been sold means that demand for materials and labour is forthcoming. That makes it somewhat a leading indicator. Given the additional spending associated with buying a new home (new furniture, etc.), this indicator could signal further knock-on effects to other industries.
At an aggregate level, the effect on the stock market of new home sales is limited. A surprise to the upside – that persists in trend for a few months – could be positive for equity markets, and vice versa, but we really need to look to the bond markets for the greater impact.
Homebuyers typically fund a majority of their purchase using debt in the form of a mortgage. When the economy is going strong, a strong print of new home sales data could foretell higher interest rates, which would be negative for bonds. During a recession, however, there is still a lot of labour slack in the economy, so a pickup in new home sales could signal the end of the recession, as homebuyers evidently start to feel as though their jobs are secure and interest rates are at cheap levels, and as builders decide to hire more staff to build the new homes. There is a low risk of inflationary pressure when there is still unused capacity in an economy, so it is unlikely that interest rates will rise for some time yet. That brings us back to the equity market, where signs of a recession coming to an end will typically be taken well.
As a result, we think it is important to consider the context of the economic cycle when looking at new home sales. It could be a relatively unimportant indicator during normal times, but during a recession it could be a leading indicator with predictive value.
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