Today, the U.S. Commerce Department announced that construction spending in July hit its lowest level in 17 years. Oddly, this news was greeted as evidence of a weak real estate market.

Nothing could be further from the truth.

The weakness that exists in the U.S. real estate market right now is due to an over-supply of houses for sale. This over-supply is caused largely by the massive increase in foreclosures in the United States during the past 18 months.

The only way to remedy the current real estate crisis is for the supply of available housing to decline. And since all projections are that the increased rate of foreclosures will continue into 2009 (albeit at a slower pace), the only viable way to have a significant reduction in the amount of available housing is for builders to build less and therefore put fewer new homes on the market.

As the supply of new homes dries up, the supply of foreclosed homes will be consumed, evening out the supply-demand dynamic.

Thus, the decrease in construction spending for July portends good news for the future of the U.S. housing market.