As some of you likely know already, I am a voracious reader.

During the day, you’ll frequently find me poring over various market reports and detailed earnings releases, or even just with a cozy book. (I’m also big fan of The New York Times‘ obituaries. They are mini-history lessons that tell the story a life lived well.)

So, as I was spending the afternoon catching up on some recent news from the housing market, I noticed some interesting parallels to other aspects of the market. In fact, it nicely summarized the state of the economy. Based on these parallels, I feel like it may carry some important implications for the stock market.

What We’re Seeing In Housing

The National Association of Realtors (NAR) reported that existing home sales fell 1.3% in January to a 5.46 million-unit pace. The long-term history of the data series is shown below.

Source: TradingEconomics.com

We can see the number of sales moved up steadily until the early 2000s, consistent with growth in demand driven by population growth. Then the infamous housing bubble led to a rapid increase in sales. The bubble burst, and the market moved to recovery mode, but recovery has slowed recently.

That story applies to the economy as well. The economy tends to grow in line with population growth, occasionally bubbles, crashes, and recovers. Technically, in addition to population growth, economic growth is also dependent on productivity factors.

Right now, the housing market and the broad economy have both slowed. But economists have an explanation for the slowdown in housing sales:

“Realtors cannot sell homes that are not on the market, however, which would likely limit an upside breakout. The lack of inventory is clearly evident in the January data, which show sales up nearly 10% from last year and the number of homes available for sale falling by an even larger 10.7%.

The 1.42 million units of inventory for sale is the lowest since 1999 and presents a major hurdle for sales. The mismatch between rising sales and falling inventories means that homes are selling quickly and often above the asking price.

Homes sold in January remained on the market for an average of 43 days, which is up from 41 days in December but down from 49 days a year ago. Many homes are selling much more quickly than that, with the NAR reporting that 42% of homes sold in January were on the market for less than a month.

The competition for homes is pulling prices higher. The median price of a single-family home has risen 6.9% over the past year to $268,600. Price appreciation bottomed at just under 4% year-to-year in April 2019 and has climbed every month since.

Competition for homes priced at or below the median has been particularly intense.”

The Problem, In A Nutshell

Here’s what I took away from that:

– The number of home sales are lower than they could be because homes are moving quickly when they are listed.
– Low interest rates and low unemployment means there should be a large pool of potential buyers.
– Higher prices should be enticing sellers to list their homes.
– But sellers are not appearing, which means demand exceeds supply and prices are rising.

Now, let’s look at the problem, which is actually pretty easy to see. Let’s say you bought a home 15 years ago for $200,000. The home is now worth $350,000. You would like to sell and enjoy the gain.

But if you sell, where will you live? Homes are expensive. That’s why you want to sell. But homes are expensive, so you can’t find a comparable home to buy at an affordable price. Many homeowners are trapped by that lack of affordability.

What Does This Mean For The Economy?

This is one problem with the economy — the costs of moving on to a new opportunity are high, and that keeps many people in place. This results in slow but steady growth, which is exactly what we have experienced in this long economic recovery.

Now, this is also a problem with the stock market. Many investors would no doubt like to take profits, but finding new opportunities for the money is challenging. This is leading to less selling and higher prices because the demand for stocks exceeds the limited supply.

When the next downturn begins, sellers will appear quickly as investors worried about high valuations will panic and sell before their gains disappear.

The question is when that selling will materialize — and, unfortunately, the answer is not apparent. I’m watching the market closely, looking for the telltale signs that a panic is developing. Despite the dip we saw across the market yesterday, my indicators still remain bullish. For now…

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