Economic theory is real and it’s not supernatural forces at work

Stocks gave investors a bumpy ride yesterday as they digested mixed earnings. Candidate-apparent Kamala Harris closes in on rival Trump, but still has plenty of ground to cover.

Reality for realtors. How could something as simple as supply and demand be real? You see what economists look like – not that you should judge us like that 😉. There is lots of complex math, typically calculus… yes there is a use for it, after all. It must seem like some sort of dark art to most average folks. We spend years studying abstracted reality, often boiling it down to the intersection of two curves or by finding a maximum or minimum of a curve. That’s it? 4 years of undergrad, 2 years for an MBA, and at least 2 – 4 more years for a Doctorate and it all comes down to… supply and demand? Yes, and folks, we do all the messy math and academic paper reading SO YOU DON’T HAVE TO.

So here it is. If supply is low, prices go higher as demand increases competition for that limited supply. Worse yet, if demand increases at the same time, there is further upward price pressure as more folks compete for less supply. That has to make sense to you, and that is exactly what happened in the housing market during the pandemic. Today, there is still a lack of supply as many folks choose to stay in their homes hoping for lower rates and possibly… lower prices. It is a conundrum. If your home value is going up, you would naturally like to take advantage of the gain by selling high, but the problem is that the new home you may wish to buy has gone up in price as well. Further, if rates come down and buyers can suddenly afford to pay more for a home due to cheaper financing, there is a chance that the challenge will become more… um, challenging.

The National Association of Realtors released its Existing Home Sales number yesterday and it came in lower than the prior month and lower than economists were expecting. Have a look at the following chart to get an idea of how yesterday’s number fits into history.

OK, because I have been extensively trained in economics, and I wear a bowtie on the regular (check out my daily videos on Instagram if you don’t believe me https://www.instagram.com/siebertfinancial/ ), I couldn’t help but to add a bonus drawing on the chart. First, the chart itself shows the monthly unit sales (in millions) of existing homes. You will note that we are currently near all-time lows hit in 2009 and 2010. More important, you will note that the trend is clearly negative, as in less existing homes are selling. Why is that?

Is it because mortgage rates are so high, and buyers are waiting for them to come down? Perhaps. But it may be something else. In this same series, NAR puts out median prices of existing homes. Why don’t I just show you that. Have a look at the chart, don’t dwell, then follow me to the finish line… er, curve.

Can you see it? No mystery here, folks, just median prices at all-time highs. Now go back to the first chart where I drew you a little picture of a demand curve. It is a downward-sloping curve with price on its y-axis and quantity demanded on its x-axis. It is downward sloping because as prices increase, less units are demanded. Go on, read that again. Got it? It shouldn’t surprise you.

Median home prices are really high right now due to low supply and strong demand. This has pushed prices higher, higher, and yet higher. Those higher prices, which are clearly delineated in the second chart, have caused demand, shown in the first chart to ebb to near-all-time monthly lows. Now, there is a bunch more economics to go through to show how the demand curve will ultimately shift to the left, causing excess supply forcing prices lower, but alas, I promised to keep things simple for the day. Just recognize that these magical forces are at work, and they will ultimately work for you. When? Well, that is one thing microeconomic theory doesn’t exactly cover, other than stating “eventually.” It’s true, I can’t make these things up.

YESTERDAY’S MARKETS

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• S&P Global US Manufacturing Flash PMI (July) is expected to have remained constant while the Services PMI may have slipped to 54.9 from 55.3.
• New Home Sales (June) may have increased by +3.4% after falling by -11.3% in May.
• This morning, Thermo Fisher Scientific, WABCO, Boston Scientific, Tenet Healthcare, and International Paper all beat EPS and Revenue estimates while KBR, AT&T, Otis Worldwide, General Dynamics, Old Dominion Freight, Fiserv, and NextEra Energy missed. This afternoon, after the bell we will hear from Ford, Whirlpool, Chipotle, IBM, Waste Management, Knight-Swift Transportation, Newmont, ServiceNow, Annaly Capital Management, Align Technology, United Rentals, and Viking Therapeutics. Last night’s notable misses include Tesla, Capital One, Mattel, Enphase Energy, and Visa.