By Colin Barr
September 21, 2010

Don’t get carried away with Tuesday’s housing market surprise. A sustainable recovery is still years away.

Housing starts jumped more than 10% to a four-month high, the government said Tuesday. Permits for new construction also rose, the Commerce Department said. The news comes on the heels of the umpteenth bust-era runup in the homebuilding stocks.

But despite the upbeat signs, Tuesday’s results were distinctly mixed. The headline housing starts number was boosted by a large rise in the volatile multifamily category. And the closely watched single-family housing permits number actually fell, for the fifth straight month.

“Although the headline looks good, the details of the report paint a more downbeat picture,” writes Bank of America Merrill Lynch economist Michelle Meyer.

What’s more, the outlook remains dismal, thanks to years of overbuilding that have left housing markets across the country in various states of oversupply. There is a year’s worth of unsold houses on the market right now, which is roughly twice the typical level — and that doesn’t even count the so-called shadow inventory that would come onto the market if conditions improved.

Though there is an impulse nowadays to blame everything on Ben Bernanke and Tim Geithner, another view is that the government’s massive efforts to prop up the housing markets – costly though they have been — have actually worked as well as they might have been expected to.

Sure, prices are still soft and banks are still stuffed to the gills with bad loans and foreclosed properties. Noncurrent assets and other real estate owned hit 3.3% of bank assets in the second quarter – down a shade from last year but nearly seven times the 2005 level.

But by the same token, the relative stability of prices over the past year has given the banking sector time to find its footing and the rest of the economy a chance to creep forward.

According to this view, the government has succeeded in placing the housing market, once the source of so much economic instability, in position for a long slog back to health.

This will not have anyone turning cartwheels, obviously. Given the weakness of the economy and the slow rate of household formation in recent years, it will take years to absorb all the unwanted houses – a sobering thought when there is no end in sight to high unemployment.

But the good news, such as it is, is that unless there’s another shock the housing market isn’t about to bring the entire house of cards down again.

“Low rates and Fed mortgage buying have freed up sufficient liquidity to allow the ‘shadow inventory’ to remain in the shadows,” says Andrew Barber of Waverly Advisors in Corning, N.Y.

“With such significant supply overhang, however, the market cannot rise appreciably,” he adds. “As long as the Fed’s put option is in place it might take something like a double-dip scenario or sudden rate environment shock to spur a sell-off. As such we could see this asset class tread water for a very significant time period.”

Treading water isn’t much fun, but think back to this time two years ago and tell me it doesn’t beat the alternative.

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