U.S. Builders Began Work on Fewer Homes Than Forecast

By Bob Willis

Sept. 17 (Bloomberg) -- Builders in the U.S. broke ground on fewer houses than forecast in August, signaling the worst housing recession in a generation will continue to weigh on growth in coming months.

Housing starts fell 6.2 percent in August to an annual rate of 895,000, the fewest since January 1991, from a revised 954,000 pace in July, the Commerce Department said in Washington. Building permits, a sign of future construction, dropped 8.9 percent to an 854,000 pace.

Builders are scaling back as stricter lending and record foreclosures swell the number of properties on the market. The housing and credit meltdowns that led to the collapse of Lehman Brothers Holdings Inc. may continue to subtract from economic growth for the rest of the year and into next.

``The home-construction industry is still in a deep recession and will remain there probably for the rest of the year,'' said Patrick Newport, an economist at Global Insight Inc. in Lexington, Massachusetts, who forecast a decline to 893,000. ``There are just too many houses on the market.''

Treasuries rose after the report, with 10-year notes yielding 3.39 percent at 9:35 a.m. in New York, down from 3.44 percent late yesterday. Stocks dropped after the government took control of American International Group Inc., the nation's largest insurer by assets. The Standard & Poors' 500 index was down 2.2 percent to 1187.27

Starts were projected to fall to a 950,000 annual pace, according to the median forecast of 74 economists polled by Bloomberg News. Estimates ranged from 893,000 to 1.04 million.

Larger Than Expected

The decrease in permits was also larger than anticipated.

Compared with August 2007, work began on 33 percent fewer homes.

Construction of single-family homes declined 1.9 percent to a 630,000 rate, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, dropped 15 percent from the prior month to an annual rate of 265,000.

Starts decreased in three of four regions, led by a 15 percent slump in the Northeast. Construction was down 14 percent in the Midwest and 7.4 percent in the South. The West showed an 11 percent gain.

Builders completed 961,000 homes at an annual rate last month, the fewest since September 1982.

Combined existing and new-home sales have declined 36 percent from their 2005 peaks. Nationwide, home prices have fallen 19 percent on average from their peak in July 2006, according to the S&P/Case Shiller index of 20 cities.

Credit Crunch

The credit crunch spawned by the subprime mortgage crisis forced Lehman Brothers Holdings Inc. this week to file for bankruptcy, just a week after the government took over Fannie Mae and Freddie Mac, the two biggest buyers of mortgages.

Federal Reserve policy makers yesterday left the benchmark interest rate unchanged at 2 percent for a third consecutive meeting. Chairman Ben S. Bernanke and his colleagues signaled they will continue to address market turmoil with emergency lending.

As banks tighten lending standards and confidence slumps, consumer spending is faltering. Retail sales in August dropped for a second month, Commerce reported last week.

Homebuilders remain gloomy. A report yesterday from the National Association of Home Builders/Wells Fargo showed confidence among U.S. homebuilders this month held near the lowest level since records began in 1985.

Forced Into Foreclosure

As home prices continue to fall, more and more Americans a forced into foreclosure as they owe more than their homes are worth. Stricter lending rules also limit opportunities to refinance out of adjustable-rate mortgages before they reset higher.

Foreclosure filings rose to a record in August, RealtyTrac Inc. said Sept. 12. One in 416 U.S. households got a default notice, was warned of a pending auction or was foreclosed upon.

Toll Brothers Inc., the largest U.S. luxury homebuilder, o Sept. 4 reported a fourth straight quarterly loss.

``Explosive energy price increases, rising unemployment an severe mortgage and credit'' conditions cut demand, Chief Executive Officer Robert Toll said on a conference call. ``Weak consumer confidence has kept many potential buyers from taking advantage of the current buyers' market.''

To contact the reporter on this story: Bob Willis in Washington bwillis@bloomberg.net.