This data continues to indicate that the bounce seen in new construction activity that occurred between March and July was not the start of a V-shaped housing recovery but rather a government induced bounce brought on by the government home buyer tax credit handout which worked to fuel unusually strong seasonal activity and helped release pent-up demand sidelined by the epic financial panic at the end of 2008.

It's important to consider that at 476K single family units (SAAR), the level of national housing starts still remains substantially below that seen in October 2008. Another important factor in today's results was the significant declines to multi-unit housing structures with permits for structures with at least 5 units dropping 18% month-to-month and 62% year-over-year while starts dropped 33% month-to-month and 78% year-over-year.

Permits for multi-unit housing structures with less than 5 units declined 16% month-to-month and 51% year-over-year while start appears to have dropped so substantially that the Census Bureau held back the seasonally adjusted results citing that "[the data] does not meet publication standards because tests for identifiable and stable seasonality do not meet reliability standards."… though seasonally unadjusted there was a 50% month-to-month and 60% year-over-year decline.

Single family housing permits, the most leading of the above indicators, again suggests declining future construction activity dropping 4.0% nationally as compared to October 2008 and an astonishing 74.11% since the peak in January 2005.

The one slight "green shoot" in Wednesday's data, however, was that although most regions showed declines to permits with the Northeast declining 4.1%, the Midwest declining 12.2%, the South declining 3.7%,... the West actually registering the first year-over-year gain in permits in 46 consecutive months, a slight move up of 2.13%. Keep in mind that these declines are coming on the back of the last three years of record declines.

With the U.S governments home buyer tax credit now extended through 4/30/10, I suspect that during the 1^st quarter of 2010 the New Residential Construction Report will start to show additional "Green Shoots". It will cause some people to claim the housing recovery is well under way; however it will be just another artificial bounce in new home construction sponsored by the U.S government via the $8,000 and $6,500 tax credits.

There will be some short term pressure on the home builder stocks in the short run which should create a short term trading opportunity to the long side. Let's look at ITB (iShares Dow Jones U.S. Home Construction ETF); it currently trades at $11.80 down from the September high of $13.91. A possible long trade sets-up if you can buy ITB $11-11.50 range and then during the 1^st quarter the "Green Shoots" based on the  New Residential Construction Report should push ITB back towards the September high of $13.91. Look to unload ITB in the $13.50-14 range, and start to build a short position in ITB at levels above $13.75(only if government is going to let the tax credit expire) to take advantage of a correction in home builder stocks because the 2^nd quarter 2010 New Residential Construction Reports I suspect will show weakness. I would target a buy cover of $8-9.25 range in the 2^nd half of 2010.

Disclosure: Author holds no position in ITB.