Yesterday the stock market began a sucker's rally based on housing starts that, themselves, are setting us up for an extension of the housing crisis.

Yesterday:

New home construction ticked higher in June, the government said Tuesday, as two key measures topped expectations.

Housing starts, the number of new homes being built, rose 14.6% in June to an annual rate of 629,000 units, up from a revised 549,000 in May, the Commerce Department said...

While construction has shown some resilience recently, the market for new homes has been stifled by a glut of foreclosed properties.

In addition, the overall housing market has been hindered by high levels of unemployment, despite a modest pick up in hiring this year.

The market rallied 200 points (also, supposedly, due to a new debt ceiling plan... though the majority of the rally yesterday seems to have occurred at the opening bell as a result of the housing starts report).

Then, today:

Sales of existing homes dipped in June as buyers unexpectedly backed out of contracts, according to the Realtors group.

Home sales fell 0.8% to a seasonally adjusted annual rate of 4.77 million, down from 4.81 million in May, the National Association of Realtors said Wednesday.

Economists had expected a June sales rate of 4.93 million homes, according to consensus estimates from Briefing.com.

So even though the market for homes has been stifled by too much supply and even though sales of existing homes from a massive inventory are dropping, the housing industry decided to start building new houses to add to that supply?

The reason why housing prices have dropped is due to an unsustainable level of too much construction leading to oversupply. We have oversupply but we're building more houses?

Given market realities, I would think this is just a blip on the radar. I can't imagine we'd actually see a strong rebound in new housing construction when the market already has too many houses. But if we do, this is not something the stock market should rally on since, in the medium to long-term, this would be setting us up for another crash in the housing market.

We shouldn't celebrate that more houses are being built in a market swamped with too many houses--we should celebrate when more houses are being sold.

Unfortunately, fewer houses are being sold... not more.

As it is, we're at the bottom of a deep hole. And we're digging deeper with every house we build.