June 18 (Bloomberg) -- Confidence among U.S. homebuilders fell this month to the lowest since February 1991 as interest rates climbed and delinquencies surged.

The National Association of Home Builders/Wells Fargo index of sentiment declined to 28 this month from 30 in May, the Washington-based association said today. Readings below 50 mean most respondents view conditions as poor. Economists surveyed by Bloomberg News forecast the gauge to stay unchanged this month.

Homebuilders including Hovnanian Enterprises Inc. are losing money as they cut prices to stem a slide in sales amid stricter standards for getting mortgages. Builders have scaled back projects to work off bloated inventories, a sign housing construction will weigh on growth for the rest of the year, economists say.

``There will be continuing declines in home building through the second half'' of this year, said Robert Mellman, an economist at JPMorgan Chase Corp. in New York. ``If rates hadn't gone up, we would have expected it would have stabilized. We've put off the stabilization in housing until early next year.''

JPMorgan Chase correctly forecast the drop in the homebuilding index. The bank's economists now project residential construction will fall at a 7.5 percent annual rate in the second half, compared with a previous forecast of a 2.5 percent drop.

The median forecast of 35 economists surveyed by Bloomberg was for the index to stay at 30. Predictions ranged from 28 to 32.

Builders are asked in the survey whether sales are ``good,'' ``fair'' or ``poor'' and to gauge prospective buyers' traffic.

Treasuries Gain

Treasuries extended gains after the report, with yields on benchmark 10-year notes slipping to 5.14 percent at 3:10 p.m. in New York from 5.17 percent at the end of last week. The yields reached a five-year high of 5.32 percent June 13 as evidence mounted the overall economy is accelerating.

The group's measure of single-family home sales fell to 29 from 31. The index of traffic of prospective buyers slipped to 21 from 22. A gauge of sales expectations for the next six months declined to 39 from 41.

``The crisis in the subprime sector has prompted tighter lending standards in much of the mortgage market, and interest rates on prime-quality home mortgages have moved up considerably,'' NAHB Chief Economist David Seiders said in a statement. ``We expect housing to exert a drag on economic growth during the balance of 2007.''

Fed's Take

Federal Reserve policy makers last month acknowledged that the housing recession will hold down growth longer than they had anticipated. At the same time, officials have kept their outlook for ``moderate'' growth in the overall economy as consumer spending gains and manufacturing accelerates.

Some reports in recent weeks pointed to reviving demand for homes. The Mortgage Bankers Association's index of applications for mortgages to purchase homes rose an average 5 percent in May from the prior month and was up 6 percent from a year ago. Purchases of new homes unexpectedly jumped in April by the most in 14 years from April, the government reported last month.

Still, a large stock of unsold homes means that builders are reducing their projects. Inventories in April equaled 6.5 months' worth of sales, down from a record high of 8.1 months' worth in March.

``The environment is still very tough for builders,'' Joshua Shapiro, chief economist at MFR Inc. in New York, said before the report. ``There is still a lot of inventory out there and higher mortgage rates certainly don't help.''

Housing Starts

Building permits, which signal intentions of starting projects, fell in April to the lowest since June 1997. The Commerce Department may say tomorrow that housing starts fell last month to an annual rate of 1.473 million, from 1.528 million in April, according to the median forecast.

The housing market also must deal with the burdens of rising mortgage rates and tighter lending standards.

Thirty-year mortgage rates at the end of May averaged 6.37 percent, rising further to an average 6.74 percent at the end of last week, according to Freddie Mac, the second-largest purchaser of U.S. mortgages.

The number of U.S. homeowners who face possible eviction because of late mortgage payments rose to an all-time high in the first quarter, led by subprime borrowers, the Mortgage Bankers Association said in a report last week.

The National Association of Realtors on June 6 lowered its forecasts for home construction and sales for at least a fourth time this year, saying stricter lending standards and a squeeze on subprime lending are making homes less affordable.

Foreclosures Jump

U.S. foreclosure filings surged 90 percent in May from a year ago, RealtyTrac Inc., which monitors foreclosures, said June 12. The failure of at least 50 subprime lenders, who make loans to consumers with poor or limited credit history, raised concern homes will be thrown back on the market as foreclosures rise.

Red Bank, New Jersey-based Hovnanian Enterprises, the state's largest homebuilder, last month reported its third consecutive quarterly loss as it cut prices and wrote off land options while sales continued to drop.

``The housing market weakened in the latter part of the second quarter and the slower conditions have continued into May,'' Chief Executive Officer Ara Hovnanian said in a statement.

Today's report showed confidence fell in three of the four U.S. regions. The index declined to 27 from 32 in the West, to 19 from 22 in the Midwest and to 32 from 33 in the South. It rose to 35 from 32 in the Northeast.

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

Last Updated: June 18, 2007 15:18 EDT