U.S. Housing Starts Fall to 17-Year Low, Permits Drop

By Shobhana Chandra

Aug. 19 (Bloomberg) -- Builders in the U.S. broke ground on the fewest houses in 17 years in July, signaling the residential- construction slump will continue to hurt economic growth.

The 11 percent decrease to an annual rate of 965,000, the lowest since March 1991, followed a 1.084 million pace the prior month, the Commerce Department said today in Washington. July's level was higher than economists anticipated. Building permits, a sign of future construction, also fell.

The report will reinforce concern that stricter lending rules, rising borrowing costs, falling property values and record foreclosures will further depress home sales and cause builders to keep retrenching. Housing, job losses and the credit crisis may weaken the economy for the rest of this year and into 2009.

``There's still a lot of excess inventory,'' Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York, said before the report. ``Foreclosures are competing with builders, and that will keep builders on the sidelines for a while.''

The Labor Department reported separately that prices paid to U.S. producers in July rose double the amount that economists had projected. The producer price index climbed 1.2 percent from June. Stripping out food and fuel costs, prices were up 0.7 percent, exceeding the 0.2 percent median projection among economists surveyed by Bloomberg News.

Treasuries, Stocks

Treasuries were little changed after the reports, with benchmark 10-year notes yielding 3.81 percent at 8:37 a.m. in New York, from 3.82 percent late yesterday. Futures contracts on the Standard & Poor's 500 Stock Index were down 0.9 percent at 1,270.20.

Starts were projected to fall to a 960,000 annual pace from a previously estimated 1.066 million in June, according to the median forecast of 77 economists polled by Bloomberg News. Estimates ranged from 875,000 to 1.09 million.

Compared with July 2007, work began on 30 percent fewer homes.

Permits decreased 18 percent to a 937,000 annual pace, lower than the 970,000 rate projected by economists, according to the survey median.

Construction of single-family homes fell 2.9 percent to a 641,000 rate, the fewest since January 1991, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, dropped 24 percent from the prior month to an annual rate of 324,000.

Northeast Slumps

The decrease in starts was led by a 30 percent decline in the Northeast. Construction fell 8.2 percent in both the South and West. Starts in the West slumped to a 26-year low. The Midwest showed a 10 percent gain.

The magnitude of the July drop in the Northeast reflected, in part, a payback from an unexpected surge the prior month. Starts and permits jumped in June as builders hurried to break ground ahead of new regulations in New York City's building code that took effect July 1.

Underneath the gyrations, demand is weakening. Sales of existing homes fell to a 10-year low in the second quarter, according to the National Association of Realtors. A third of all sales were foreclosures or ``short sales,'' in which lenders take a loss on a property.

Financing is also becoming scarce, a quarterly survey of banks by the Federal Reserve showed. Compared with the April survey, more of the loan officers polled reported they tightened standards on prime mortgage loans and on non-traditional loans.

Mounting Losses

The five largest U.S. homebuilders reported a combined $1.08 billion in losses in their most recent quarters.

Builders are pessimistic as losses mount. The National Association of Home Builders/Wells Fargo's sentiment index yesterday showed optimism held at a record low in August for a second month.

Still, construction companies are making some headway in reducing the supply glut. The number of new homes for sale dropped in June by the most in four decades.

The government's tax rebates have helped some housing- related companies. Lowe's Cos., the world's second-largest home- improvement retailer, yesterday said full-year profit may fall less than it had anticipated and larger rival Home Depot Inc. today said profit fell les than analysts estimated as customers spent the rebates.

``The macro economic factors pressuring consumers and the ongoing challenges and uncertainty of the financial markets suggest a cautious sales forecast for the balance of fiscal 2008 is prudent,'' Lowe's Chief Executive Officer Robert Niblock said in a statement.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net