KEY DATA: Sales: +0.7%; Over-Year: -1.5%; Prices: +4.2%

IN A NUTSHELL: “A lack of supply is keeping housing sales down but prices up.”

WHAT IT MEANS: It is hard to buy homes that are not for sale and that is a problem facing the housing market. On Tuesday, we learned that new home sales fell in August, in no small part because Houston was underwater. That it is hard to sell properties you cannot get to should have surprised no one. Today we found out that once the waters recede, sales proceed. The National Association of Realtors reported that existing home purchases rose in September. Now that was a bit of a shock since Florida took a licking. Apparently, demand in Houston start ticking again and sales in the South were off only modestly. The Midwest and West reported increases but purchases were flat in the Northeast. Over the year, however, sales did drop. While the inventory of homes for sale edged up in September, it was down over 6% from September 2016. That is limiting buyers’ options and forcing them to pay up for what is available. There is little reason to think that will change anytime soon.

MARKETS AND FED POLICY IMPLICATIONS: Housing is critical to not just growth but inflation as well. We tend to think of all the sectors that are affected when home construction and sales rise sharply. But you also have to consider the impact of home prices on consumer inflation. This enters the Consumer Price Index through the category called “owners equivalent rent”. Basically, it is what homeowners think they can rent their homes. Prices and costs of operations are included in this, so it is not strictly a housing price measure. But in September, this component was up 3.2% over the year, well above the 2.2% rise in the overall index. Since it constitutes almost one-quarter of the index, continued housing price pressures will add to inflation. Of course, that may be good as far as many Fed members are concerned. If they are to defend a rate hike, it would be better if inflation is accelerating and the lack of supply in the housing market is just the factor that could help that happen. As for the markets, earnings do matter, at least sometimes, and this is earnings season. However, paraphrasing Animal Farm, “all earnings are equal but some earnings are more equal than others”. Thus, when there are big misses, even when they come from huge companies, investors continue to buy, buy, buy. Of course, there also may be some exuberance setting in.