Why Are Housing Starts Up?

Some pundits are pointing to increased housing starts as a sign the economy is recovering. 

Don't be fooled.

A couple things are happening.  As Paul Krugman, Nobel Laureate economist and liberal conscience, notes, a 17% increase in next to nothing is still next to nothing.

new-home construction has come to a virtual standstill, so even large percentage changes mean only a handful of extra homes started. If we’re building 6 homes a month nationwide, and that goes to 7, it’s a 17 percent rise — but makes almost no difference in real life.

There's another issue at hand as well.  In many markets developed lots are in such oversupply they will take years to absorb.  In most cases that means banks have repossessed them from leveraged developers who cannot unload them in a timely fashion. 

Not wanting vacant land on their books, banks are selling lots at firesale prices which makes selling a new home on them competitive with existing homes.  Builders who have survived the crash but sit twiddling their thumbs have nothing to risk snapping up these cheap lots.

Once those developed lots are absorbed, there won't be any new ones for a long times with snakebitten banks reluctant to lend on such projects.

To put it another way, vultures picking at a corpse laying in the desert sun is no sign of health.