The ingredient for a housing bottom is not falling starts

Rising sales are the cure

Today's out-sized increased in new home sales, coupled with strong gains in housing starts over the past two months, puts to rest the view that home builders must stop building new homes so potential buyers can soak up the excess houses on the market.

Yes, that argument makes sense for many manufactured items, and we saw Corning (GLW) today mention that increased demand was first met by inventories before the largest maker of LCD glass in the world started to re-open idle production lines. See story.

But housing is different. A potential buyer may be swayed by a steep discount on an empty home that sprung from a contract cancellation. But many buyers want to pick out the model, the counter tops, the carpet, and numerous other options.

Hence, starts had been in decline not because builders were trying to ride themselves of inventories but because traffic and interest had been waning.

Housing starts jumped two months ago because traffic had begun to accelerate, and now new home sales are nearly 17% off January's low.