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THE ONLY REAL SURPRISE in the latest disastrous batch of data on housing is that anybody is surprised.

With the $8,000 tax credit originally set to expire, housing starts plunged nearly 11% in October, to a seasonally adjusted annual rate of 529.000 units. That put new home construction back to the dismal levels of last spring before a temporary blip lifted housing activity during the warm-weather months.

Even though the home-buying subsidy was extended through next March and expanded beyond first-time buyers, there's little evidence that these giveaways are working. Applications for mortgages for home purchases, for instance, fell to a 12-year low last week even with a 30-year mortgage going for well under 5%.

For reasons best understood themselves, analysts had forecast an uptick in housing starts to the 600,000 annual rate in October from September's 592,000 pace. While the lowest fixed mortgage rates and reduced home prices have kept housing from collapsing further, the 10.2% unemployment is working against home buying. Meantime, foreclosures, which are running at 300,000 a month are adding to the inventory of homes available for sale.

In other words, prospective buyers have an array of houses available to them in most regions at knock-down prices. But there's no reason for them to hurry while apartment rents are tumbling. Builders, meanwhile, would be loath to build new houses on spec, even if their banker would provide the financing.

All of which points to an extended period of depressed housing activity after the excess supply from the boom built on absurdly easy credit is worked off. This is an example of what economists of the Austrian school call "malinvestments," which are the inevitable result of a credit inflation. The boom results in an inevitable bust, during which past excesses have to be corrected, however painfully.

That's not in keeping with 20th century let alone 21st century political realities, which mean government actions to counter the downturn. Don't waste time debating the merits; the matter is settled. For practical investors, the question is the effectiveness of the government's efforts.

Even with the Federal Reserve's program to buy over $1 trillion of mortgage-backed securities and the myriad other schemes to bolster housing, including the tax credits for homebuyers, the government isn't getting much bang for all those bucks.

As noted here previously, the $8,000 tax credit for first-time homebuyers may have actually cost the government $43,000 for each extra house sold ("Homebuyers' Handout -- Worse Than Cash for Clunkers," Oct. 21.) That's because most of the recipients of Uncle Sam's largesse would have bought a house anyway. Now that the credit been extended to next March and applied to home buyers who were previously homeowners (with some restrictions), who knows how much extra incremental house sale will cost the Treasury.

Yet another federal housing-support program also is looking like a boondoggle. The Federal Housing Administration, which backs home loans with down payments of as little as 3.5%, has become the new subprime lender, some contend..

That charge comes from Robert Toll, chief executive of luxury home builder Toll Brothers (ticker: TOL.) As the Developments blog at wsj.com reports, Toll called the FHA a "definite train wreck" at a builder's conference Wednesday, a week after the agency reported its insurance reserve ratio had fallen to just 0.53%.

The FHA has become one of the sources of low-down-payment home loans, but that's led to soaring defaults. "What the government is doing is beyond belief in that once upon a time... FHA did very small percentage of business in the country," the Developments blog quoted Toll as saying. But he noted that the agency's market share has boomed in recent years "and the reason is, yesterday's subprime is today's FHA." The FHA avers and contends its borrowers' credit scores have increased to 690 from 625 two years ago and has improved its risk control.

But, as the latest Fed survey of senior bank loan officers released last week showed, private credit conditions continue to tighten, including for residential mortgages. And given the overhang of unsold homes -- plus a shadow inventory from homeowners who have been holding back from putting their house for sale until the market improves -- no wonder homebuilders are glum.

The National Association of Home Builders/Wells Fargo index of builder confidence hovered at a low 17 for the second straight month in November. A reading below 50 denotes conditions respondents deem as poor. The gauge averaged 16 last year.

"What the government is doing is beyond belief in that once upon a time... FHA did very small percentage of business in the country," Toll said.

But he noted that the agency's market share has boomed in recent years "and the reason is, yesterday's subprime is today's FHA."

Even with housing affordability the highest in years from low mortgage rates and reduced home prices, there's little reason to expect a revival in homebuilding as long as the inventory of unsold houses and foreclosures remain high, credit is tight and unemployment is in double digits.

Perhaps that's why the shares of the big public homebuilders, as represented by the SPDR S&P Homebuilders exchange-traded fund (XHB), topped out two months ago and have been moving sideways to lower since. That says more than economists' misguided forecasts of rising housing starts.

Comments: randall.forsyth@barrons.com