Economists have long looked at housing starts -- or the number of new homes being constructed -- as an early indicator of the way in which the economy is headed.  Home building sucks in lots of different products and services.  Carpenters, obviously, but then earth movers who may or may not need to pick up one of Caterpillar's finest, plus all the capital goods, plus, when it sells, the home furnishings.

 So it is a big rock tossed into our economic pond, for which it is easy to see a ripple effect.

It is what a TRUE stimulus package could have done if government used deficit spending for infrastructure improvements rather than modest tax refunds used by many to simply retire credit card debt, thereby shifting said debt from individual backs to our collective back as a nation.  That, however, is a rant for another time. 

I listened to a talking head on MSNBC sing the good news while getting dressed this morning, prompting me to search the internet once in my office for more detail.

And the devil is always in the details. 

According to CNNMoney.com , We broke ground on 598,000 new homes in August, up 1.5% from a revised 589,000 in July.  More optimistically, building permits rose 2.7% for the same period from 564,000 in July to 579,000 in August.  I say more optimistically, because you have to have the permit before you can break ground.  That suggests increase in backlog to go along with the housing starts.  

Other good news includes: 

1. The index of homebuilder confidence (whatever that is) rose to its highest level since May 2008.
2.  New home sales rose 9.6% from June to July.
3. Existing home sales rose 7.2% from June to July.  Likewise, they were up 5% from a year ago July.
4. After three years of declines, house prices rose 2.9% in the three months ended June 30 of this year.

 So, after years of house price declines, there's an uptick.  An old adage goes that price is the market clearing mechanism.  With builders and realtors having a glut of supply, prices have to drop to seek market equillibrium.  If prices are rising and home starts are rising, then it suggests demand has slowly inched past supply in the market dance.

The troubling aspects, however, are as follows: 

1. We had a boomlet in interest only and Adjustable Rate Mortgages (ARMS) in 2005.  Many of these set the initial payment for 60 months.  As such, these will have increased payments beginning in 2010.  This suggests more foreclosures going ahead.
2. Housing starts for  single family homes actually fell 3%.  Indicating an increase in multifamily construction drove the current increase.
3. The month to month comparison shows upswing in starts and permits.  On the year-over-year comparison, however, housing starts are down 29.6% and permits are down 32.4%.  

That's the inexact nature of the "science" of economics.  So many variables enter into the equation, it becomes difficult to determine what will transpire.  In education settings economists can "assume" variables constant to look at the impact of isolated incidents.

A joke goes that an econimics professor and student were walking along the campus when they fell into a construction ditch.  The student begins to panic, wondering how they will extricate themselves from the predicament, while the economics teacher pompously looks at the student and tells him not to worry.  The first thing they have to do, the teacher says, is to "assume a ladder." 

The world does not work that way, however, and hence why economics gets called an "inexact science."  You cannot put business in a clean lab and view it in white lab coats.

When trying to triangulate data for the purposes of market forecasting, an old mentor boss of mine used to glibly wave his hand over our tail chasing calibrations to get us to simply stop thinking and start writing the report by calling it the "law of compensating errors."  We might have had one factor a little low, and another a little high, but, in the end, it was about as good as we were going to get.

If that didn't work, his voice would raise a little and he would say, "When you are cutting with an ax, you don't calibrate with 150 grade sand paper."

 So let's look at the bad news.  Is this a turnaround, or is it, as wall street analysts call it, a "dead cat bounce?"  (Dead cat bounce is also referred to as a "W" in the down scale, with the middle uptick being the impact of the cat coming up off the ground before hitting the true bottom, if you will.) 

1. Mortgage triggers for new payments. This will cause pain, to be sure.  Interest rates remain low, however, so the payment hits should not be bad.  Furthermore, fewer individuals, given rising home prices, will be underwater and should be able to refinance into more conservative instruments.
   
2. Multifamily Housing Starts Fueling the Uptick.  For years I have had a personal fascination with tracking the economy based on the front end of the baby boom generation.  A lot of pent up demand for the recreation leading to procreation entered America -- both figuratively and literally -- when the young men return home from Europe in 1945, and birth control was not as fool proof.  This war-driven anomaly fuels many aspects of our lives.  Right now education populations are on the decline as we finish educating echo boomers and begin educating echo, echo boomers.  I know.  My brother's grandaughter -- the front end of the echo, echo boom -- is three months older than my daughter -- the tail end of the echo boom.  That big bulge softens from one generation to the next akin to a snake digesting a mongoose.  Boomers now drive the economic dysfunction around government-run elder care programs.  We really need to blame the WWII generation for lousy family planning.
   
   Boomers are reaching the age where they wish to downsize their homes.  They are looking for condos and townhouses to avoid yard work and all of the attendent, physical demands associated with home ownership.  So, are these mutlifamily units inexpensive first time buyer opportunities or shelters for those having lost income, or are they more quality built units targeted at active seniors?
   
3. Drastic Drop in House Starts Year-over-Year.  Hey.  We  KNEW the economy was in the dumper last year.  Why should this be a surprise?