Homes under contract to buy rose in July for the sixth straight month, reaffirming the widely held view that the worst of the housing market correction is behind us. The index of pending home sales rose 3.2% from the month before, according to Bloomberg.

Even Mark Zandi, the famously bearish chief economist at Moody’s Economy.com, said “The housing market is much improved.”

Indeed, buying activity is strong, and some markets could even be described as “hot,” with little inventory and many multiple bid situations. Ultimately, the question is the sustainability of this “rally” in the low end markets, and how things will shake out of the government starts to ratchet back it’s support of the housing market.

New Home Sales rose unexpectedly in September, but prices continue to fall. According to Bloomberg:

• Purchases increased 2.7 percent to an annual rate of 464,000
• Median sale price decreased to a four-year low
• The median price declined 9.1 percent from a year earlier to $218,400
• The supply of homes fell to 10.4 months from 11.4 months

Two quotes sparked our interest from two very different market participants.

First, we have Richard Dugas, the chief executive officer of Pulte Homes:

The industry continues to be plagued by tighter mortgage availability, a growing number of foreclosures, and a historically high supply of unsold homes.

Some of the biggest pieces of misinformation being spread by mortgage market participants are that tighter mortgage supply is (A) a bad thing for potential borrowers and (B) should be loosened to get us back to “normal” market conditions.

The fact of the matter is that people can get mortgages but they cannot get approved for high enough amounts to save the homebuilders. The reality is that there continues to be a huge demand for houses but market conditions are forcing them to be purchased at more affordable levels. This doesn’t bode well for homebuilders like Pulte, hence their lobbying efforts to increase tax credits for home purchases.

Second, we have Mark Zandi, chief economist at Moody’s Economy.com.

Builders are seeing the light … they are cutting prices more aggressively. They’re very nervous about all the foreclosures.

It is amazing that a quote like this one is newsworthy in October 2008. It is hard to imagine that the homebuilding industry is finally “seeing the light” in year 3 of the housing downturn. We continue to believe the new homes market will not reach any sort of bottom until there is meaningful of consolidation in the industry. Look at the investment and commercial banking sectors, which, although still in trouble, are at least starting work through their issues and fold weaker hands into the stronger ones.

Not only are the homebuilders competing against foreclosed homes, but they are also fighting against each other. It is time for this industry to start working together before they all end up in bankruptcy courts.

Finally, work began on the fewest single-family homes in 26 years and building permits also declined last month. While supply is falling, which is good for clearing out bloated inventories, less residential construction will deepen our recession.

The housing market led us into this mess, and while focus turns elsewhere as the problems spread throughout the economy, it’s not unreasonable to expect the housing market to eventually lead us out.