The big news this week was the huge drop in housing starts. The chart below from MarketWatch shows the decline in housing starts over the last year.

Marketwatch reports that the 37.8% decline in new home projects was the “largest year-over-year decline since early 1991“.

The big news last week, as reported by the Wall Street Journal, was that vacant homes, a measure of how many homes for sale are empty, “has climbed to its highest level since the Census Bureau began tracking it four decades ago.”

So what’s the deal? The fact is that there are too many sellers and not enough buyers. Everybody who had the money and was thinking about buying a house already did so in the last 5 years. There’s nobody left to buy! It’s only a matter of time before the higher supply force sellers to lower their prices.

Sellers could always hold onto their houses - after all, you won’t record a loss if you don’t sell at all - but this works for only so long until people who are in over their heads are forced to sell. It starts to get really bad when homeowners start to default on their mortgages at record rates, like they are in California, where the default rate is at its highest in 8 years!

In fact, the Case-Shiller home price indexes showed month-over-month price declines in 7 out of the 20 cities in the composite index. Every city but one, Charlotte, showed a decline in annual returns from last year. Look for even more cities to show negative growth next year.

The housing decline is only beginning…expect it to get much worse. The real question is whether housing will bring the rest of the economy with it. So far signs point to no, but I’ll be watching.

In other news, did the market even flinch when the US Trade deficit hit it’s all time record last month: $68 billion! Of course not. Good thing, according to Cheney, that “Reagan proved deficits don’t matter”…