The Great Housing Deflation Continues

Housings starts and the Producer Price Index (PPI) were both down in July as the economy's problem continues to be deflation caused by falling housing values.

The Commerce Department said housing starts fell 1 percent to a seasonally adjusted annual rate of 581,000 units, well below market expectations for 600,000 units. June's housing starts were revised up to 587,000 units from the previously reported 582,000 units.

Multifamily unit starts tumbled 13.3 percent in July. However, groundbreaking for single family homes—the worst-hit part of the housing market, rose 1.7 percent to an annual rate of 490,000 units, the highest since October.

Compared to July last year, housing starts dropped 37.7 percent. New building permits, which give a sense of future home construction, fell 1.8 percent to 560,000 units in July. That compared to analysts' forecasts for 580,000 units. Compared to the same period a year-ago, building permits declined 39.4 percent.

The inventory of total houses under construction fell to record low 609,000 in July, the department said, while the total number of permits authorized but not yet started also hit a record low at 102,300.

That's the important news right there. New housing construction will continue to fall. It has to while the supply of homes on the market continues to be way too high compared to demand.

Meanwhile, deflation has leaked into producer prices.

The longest U.S. recession since the Great Depression of the 1930s has crushed demand and pummeled prices throughout the economy, keeping inflation pressures firmly at bay despite massive official efforts to stimulate growth.

Core producer prices, which exclude food and energy costs, edged 0.1 percent lower in July compared with a forecast for a 0.1 percent rise, and after a 0.5 percent increase in June.

So, we'll see how things work out. Deflationary pressure will continue from falling real estate. Without the stimulus, the deflation in the economy would have been significantly worse.