Are we going to have to deal with a “Double Dip” recession, or is the increasing chatter about this subject in the media just more background noise? A close look at the housing market will give us some good information on which to base some conclusions about the health of the economy.

The most recent national housing study, just completed this week by Metrostudy, involved an inspection of more than 4 million subdivision lots, in 60,000 subdivisions, in 88 MSA’s, in 19 states. The results of this study have been analyzed and the conclusions are interesting. Single Family Annual Starts in 2Q10 increased 2.1% over 2Q09. While this increase seems very small, the Quarterly Starts pace for 2Q10 is 29.2% above 2Q09, and that improvement is significant.

Where did this increase in housing production come from? Was it “stimulated” by the tax credit? Was it “stimulated” by low mortgage rates? What about foreclosures? What about the Census Bureau’s release on the 20th that the June housing starts were 5.8% below June of 2009? And, then, yesterday, the WSJ comes out with news that “The Housing Market Stumbles”. What is going on with the housing market and what does it mean to the economy?

First of all, let’s put the Census Bureau’s news release to bed. During the last 12 months, except for the month of May 2010, every Census Bureau news release on housing starts confirmed in their footnotes (fine print) that, because of the margin of error in their statistical calculations, they did not know if there was an increase or decrease in housing starts. It is for this reason that it is very important that anyone making decisions that rely on housing starts information make sure that they do NOT rely on the Census Bureau. The Census Bureau does not know, and they say they don’t know; so, ignore the news releases from the Census Bureau.

Now for the “stimulus”. No, the production increase was not “stimulated” by tax credits or low mortgage rates. The people who used tax credits were planning to buy a house anyway, and the people who would like to use the low mortgage rates cannot get a mortgage, because of lending restrictions, so the low rates are of no benefit to the market. The production increase is the result of the housing industry slowly and painfully getting rid of its excess inventory. As this has occurred over the last three years, we now find that, in many markets, we do not have a sufficient supply of new single family detached homes for sale to meet existing demand, even in this terrible economy.

Since 4Q09, only one state (Illinois) of the 19 states covered by our research experienced a decline in housing production. The rest of the states, representing about 65% of the national housing market, found it necessary to increase local single family detached housing production. It is important to remember that a significant part of the excess in housing inventory in many of the markets is Multi-Family, for sale inventory (Condos). The Inventory that puts downward pressure on home prices is Finished Vacant Inventory. In most markets, a 2.5 to 3.5 month supply of Finished Vacant Inventory is considered equilibrium. In Las Vegas, for example, the poster child of excess inventory, there is an 18.3 month supply of Finished Vacant housing inventory. However, when you remove the high-rise condo and other attached housing products, there is only a 2.4 month supply of single family detached, Finished Vacant Inventory. This is not an oversupply; this is a fairly tight market. It is also important to remember that resale homes and foreclosures do not compete equally with new homes. Consequently, the resale and foreclosures must seek a lower price point in order to compete with new homes.

I am not suggesting that we are experiencing a “recovery” in the housing market. I am saying, however, that, in order for home builders to satisfy existing housing demand, in many markets throughout the nation, they will have to increase their production rate. As they do so, they will be placing more demand on local contractors and suppliers, and this will help each local economy.

So, what’s the problem? The problem is that the financial industry in this country has ground to a halt. In the local markets, the housing industry is almost completely without financing of any kind, especially bank financing. Without being able to borrow to buy lots and build homes, it will be virtually impossible for the housing market to enter a recovery. Further, if the home does get built, the buyers cannot buy, because they do not have access to today’s mortgages that have those low, low rates. This problem is not going to change as long as the economy is hostage to the credit reporting companies that maintain credit scores. We have a declining economy and that is causing many buyers’ credit scores to change for the worse. The whole credit score program is based on a 18 year growth cycle when credit scores were rising. It is very likely that “normal” credit scores are substantially below what is now being called “normal” or acceptable.

What about jobs? Think about it. How many homes have you seen that were made in China or India. That’s right, homes are Made in America. When we build a home in the USA we are buying products in this economy and employing labor in this economy. Even the products that go into the homes, products that are made offshore, are sold and distributed in each local market and they are installed by local labor. When we build more homes, we create more jobs and local economies benefit. Said another way, we will create more jobs when we start building more homes. The most important change needed in our economy is a housing recovery.