Implications: Despite the gain in housing starts in July, today's report on home building was on the soft side. Single-family housing starts declined for the third straight month, with the weakness concentrated in the South and West. Meanwhile, the number of homes under construction hit an all-time low (dating back to 1970). Some are declaring this recent trend a "double-dip" recession for housing. We think this view is a mistaken extrapolation of the short-term trend after the expiration of the housing tax credit. Last year the government's cash-for-clunkers program moved a great deal of motor vehicle activity into July/August. There was then a temporary hangover in September, followed by a healthy recovery driven by underlying economic fundamentals. We think a similar pattern will take place in housing, after a temporary hangover due to the lapsing of the homebuyer tax credit. Although excess housing inventories remain, they are falling rapidly and even a substantial recovery in building will keep that trend intact. True, many former "homeowners" (we use that term loosely after an era of zero down payments) are becoming renters, but rental properties require construction, too. Meanwhile, interest rates remain low and cash wages are going up at a healthy pace.
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