Housing Starts Rise Slightly

The Commerce Department announced Tuesday that housing starts rose 1.7 percent to a 546,000 unit pace in July after being revised down for the previous month. What do these statistics reveal about the housing market and the economy at large? Diane Swonk gives us her take.
-Nelson Wang
Housing Remains Weak
With today's numbers and the earlier revision, the net effect is that starts are running even cooler than many expected over the summer. Moreover, building permits fell between June and July, which helps to explain why home builder confidence has dropped to its lowest levels since the panic that we experienced in March, 2009, when it appeared that there was no stopping the free fall we were in.

Falling mortgage rates have done little to stimulate demand now that home buyer tax credits have expired. Indeed, mortgage lending is one of the few areas that appears to have tightened rather than eased as credit markets continued to heal in recent months, which has caught the attention of the Fed.

More Federal Asset Purchases On the Way?
Purchases of mortgage-backed securities (MBS), which allowed shell-shocked banks to unload some of the risks associated with lending into an economy where home prices are still falling and unemployment is still rising, have slowed fairly dramatically. Fannie Mae and Freddie Mac, in particular, pulled back on their purchases once the Fed stopped buying last spring, which is just one of many reasons why the Fed is considering an expansion of their asset purchase program.

The Future of Fannie Mae and Freddie Mac
Separately, the Obama administration is holding a summit today to figure out what to eventually do with Fannie and Freddie, which were taken into conservatorship and bailed out on the eve of the financial crisis by the Bush administration. No one is expecting much, however, until next year or later, given the vital role that these behemoths now play in the housing market. Both sides of the political aisle let them grow unchecked, and as much as we all hate bailing them out, we can't do much to restructure them until we have an alternative in the private sector, which has been slow in coming. In fact, Fannie, Freddie, the Federal Housing Authority, and the Veterans Administration (all government institutions) backed about 90 percent of all mortgages issued during the first half of the year.

The Bottom Line
Anyone who tries to tell you there is an easy way to end the government's support of the mortgage market hasn't looked at the numbers or the impact such an abrupt shift would have on the value of your home. The Fed is very likely to restart its purchase program of MBS so that Fannie and Freddie can become more operational. This would help to stop the housing market from over correcting, which now appears to be occurring. Two negative quarters in a row in housing may not be enough to trigger a full-fledged economy wide double dip. It is not something, however, that many would like to risk at this fragile stage of the recovery.

Diane Swonk, chief economist at Mesirow Financial, talks to CBS MoneyWatch twice a week about the day's top economic news and developments. Her responses are edited for clarity and length.