KEY DATA: Sales: -3.2%; Inventories (Over Year): -5.8%/ Home Prices (Over Year): +5.6%

IN A NUTSHELL: “It’s hard to buy something when it isn’t for sale.”

WHAT IT MEANS: I am not a big supporter of supply-side economics, but sometimes supply really matters. Without a large choice, it is hard for people looking for homes to find something they want and that seems to be the problem facing the housing market. The National Association of Realtors reported that existing home sales fell moderately in July. Expectations were for a small decline, but the drop was greater than forecast. Demand was off in three of the four regions, with only the West experiencing an increase. In the Northeast, sales were off by double-digits and accounted for 55.6% of the national decline. This region, which has been improving steadily, makes up only about 13% of total sales. The huge fall off makes no sense and I suspect it will unwind in August. Prices continue to rise solidly and that may be due to the lack of inventory, which has declined sharply over the year.

Home prices are one area where costs are running hot and the Federal Housing Finance Agency reported that they were once again up solidly in the spring. However, the rate of increase did decelerate. Still, since January 2012, housing prices have risen at a 6% annualized pace, which is quite nice if you own a home in the parts of the country where prices are rising. And prices are about 4% above the previous peak seen in March 2007. However, the gains are not well distributed. New England, Middle Atlantic and East North Central regions saw gains at about 4% or less over the year. Meanwhile, prices surged by about 7% or more in the South Atlantic, Pacific and Mountain regions. In Vermont, prices actually fell.

MARKETS AND FED POLICY IMPLICATIONS: The existing home sales numbers were a disappointment, but I am not that disappointed. The strange huge decline in the Northeast tells me that this is not a trend, just a periodic oddity in the data. But the real issue facing both the new and existing home markets is the lack of inventory. There simply are not enough homes for sale. People are starting to give up looking as they know the pickings are slim. And those that are hanging in there are not finding what they want and they are not settling. So, this is a case where supply would likely help increase sales, and possibly sharply. The downside of a lack of supply is that prices are rising and reducing affordability. And that raises the question about why people are not offering their homes for sale. Rising values have reduced the number of home underwater or with minimal positive equity significantly, so something else may be at work. Here are two ideas: First, job mobility has been reduced so people don’t move to find a job, especially with jobs being more available. Second, while prices may be rising now, people no longer view homes as an investment and while they may want to move (and sell their current homes), the cost and pain of changing locations, especially if you have been in a house a long time, is not worth the move. I am sure there are other explanations, so if you have them please let me know. This report is not likely to do much to the thinking of investors or the Fed members as it doesn’t change the perception about the state of the economy. And with Fed Chair Yellen talking on Friday, it is best to wait and hear what she is thinking. Hopefully, we will get some idea from the talk.