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An annualized figure of 593,000 housing starts were recorded in May, considerably less than the projected 650,000 figure. This marked a 10% decrease from April’s pace, marking the lowest level this year.

Building permits, which measure the number of new residential building permits issued, also fell sharply last month. Instead of the annual rate rising from 610,000 to 625,000, building permits slid to 574,000, signaling a downturn in future construction activity.

It turns out that the recent slowdown in the housing arena was a result of the expiration of the government’s tax break for home-buyers. Similar to the cash for clunkers program, an $8,000 tax credit was given to first time home buyers, in hopes of propping up demand in the housing market.

Without this tax break incentive, it’d be costly for an individual or a family to buy a new house. As a result, purchases of single-family homes dropped for the second month in a row down to its lowest level in a year.

Switching to a more positive tone, news has been going around that US Senator Harry Reid is proposing a three-month addition extend to the tax-credit program. According to Reid, he wants this to happen because the huge influx of the amount of housing projects has created an overwhelming backlog for construction firms.

In any case, now that these programs have come to an end, it’s no surprise that we saw weaker than expected results from yesterday’s housing data. It seems to me that developments in the labor market were a mere illusion, a silhouette caused by the tax-credit framework. That said, we’ll see be seeing a clearer picture of the labor market, and I have feeling it won’t be pretty…

The only hope for the labor market may be for low mortgages rates, which of course will be dependent on the Fed‘s outlook on interest rates.

Speaking of interest rates, the massive decline in housing starts could give more reason for the Fed to sit on its hands. If the Fed continues to maintain its stance on keeping rates low for an “extended period” for the entire of 2010 while other G7 major central banks begin raising rates, we could see the dollar give up all the gains it posted this year!