Earlier this month, former Fed Chairman Alan Greenspan dispensed some widely reported optimism by opining that “the worst is behind us” in the housing correction of late. The forecast may yet prove accurate, but the skeptics are snickering a little louder today after reading this morning’s update on housing starts for October.
New construction of privately owned housing units fell sharply last month, the Census Bureau reported. So-called housing starts dropped 14.6% in October from the previous month, measured on an annualized, seasonally adjusted basis. That’s the biggest single-monthly percentage loss since May 2005.
On an absolute basis, the trend doesn’t look any better, as the chart below illustrates. The annualized rate of 1.486 million new starts last month is the lowest in more than six years. If there’s a bottom coming in housing starts, it’s not obvious at the moment. Free fall might be a more accurate term.

Housing starts, of course, are but one of several metrics documenting trends in real estate. But until and if the data starts supporting Greenspan’s prediction, prudence suggests adopting the philosophy of “Look out below.”
Meanwhile, the great question of the moment is deciding how much more fallout will harass the economy as housing corrects. The jury’s still out on this score, although there’s still reason to be mildly optimistic, argues
Ed Yardeni, chief investment strategist at Oak Associates. In a research note sent to client this morning, he writes:

The housing recession isn’t likely to spill over to the broad economy. Despite the steep decline in housing starts and in auto production, the Philadelphia Fed’s survey of manufacturers in November showed improvement with its business conditions index unexpectedly rising to 5.1 from October’s minus 0.7. U.S. jobless claims fell to 308,000 last week suggesting that the labor market remains strong. The ABC/Washington Post Consumer Comfort Index jumped again this week and is up 20 points since late August to the highest reading since April 2002.

Yes, the housing recession is “steep,” Yardeni admits. But like Greenspan, he believes that it “may be over sooner rather than later.” In support, he cites the recent rise in an index of builder confidence for sales of new single-family homes, which is published by The National Association of Homebuilders. In addition, he notes that “mortgage applications for purchases of both new and existing homes seem to be stabilizing in the past few weeks.”
The next big stress test for optimism comes at the end of this month, when a fresh batch of economic data is updated, including existing and new home sales and the all-important personal income and spending series. In the meantime, there’s plenty of opportunity to speculate. Definitive conclusions about 2007, however, remain on hold.