April 16 (Bloomberg) -- U.S. builders broke ground on fewer homes in March and permits fell to a record low, as homebuilders sought to rein in inventory amid rising foreclosures.

Housing starts fell 10.8 percent to an annual rate of 510,000, the Commerce Department said today in Washington. Building permits, a sign of future construction, fell 9 percent to 513,000.

A glut of unsold properties is pulling home prices down across the U.S., prompting builders to scale back projects. President Barack Obama’s administration has pledged measures to reduce foreclosures and the Federal Reserve is buying mortgage securities to drive down home-loan rates and spur demand.

“Buyers seem to be more interested in picking up bargain- basement prices in the existing-home market than in the new-home market,” said Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh. “Builders are justifiably cautious now with many indicators showing adverse conditions.”

A separate government report today showed that fewer Americans filed claims for unemployment insurance last week than economists had anticipated. Initial jobless claims dropped to 610,000 from 663,000 the week before, the Labor Department said.

Stocks, Treasuries

Stocks rose in early trading while Treasuries remained lower after the figures. The Standard & Poor’s 500 Stock Index gained 0.1 percent to 853.02 as of 9:57 a.m. in New York, and benchmark 10-year note yields advanced to 2.81 percent from 2.77 percent late yesterday.

Starts were projected to fall to a 540,000 annual pace from a 583,000 previously estimated pace the prior month, according to the median forecast of 72 economists surveyed by Bloomberg News. Estimates ranged from 500,000 to 608,000.

Permits were forecast to drop to a 549,000 annual rate, according to the survey median.

Construction of single-family homes was unchanged at a 358,000 rate, today’s report showed. Work on multi-family homes, such as townhouses and apartment buildings, fell 29 percent to an annual rate of 152,000 after surging in February.

The decrease in starts was led by a 26 percent drop in the West and a 17 percent decline in the South. Starts rose in the Midwest and Northeast.

Peak Level

Home starts have plunged from a peak rate of 2.27 million in January 2006, which capped the biggest housing boom in six decades. Falling construction has weighed on economic growth and plunging home prices helped ignite the global credit crisis that led to what may become the worst recession in seven decades.

In a sign the housing slump may be nearing a bottom, the National Association of Home Builders/Wells Fargo’s confidence index rose this month to the highest level since October, the group said yesterday. Confidence rose to 14 from 9, as record- low mortgage rates and falling prices started to stir demand. Readings below 50 mean respondents view conditions as poor.

Sales of both new and existing home rose in February from record lows. Still, rising unemployment continues to stifle demand as Americans shy away from big-ticket purchases. Job losses have totaled 5.1 million since the downturn began in December 2007, and economists surveyed by Bloomberg predict the jobless rate will reach 9.5 percent by the end of the year.

Foreclosure Filings

With job losses mounting, foreclosure filings rose 24 percent in the first quarter from a year earlier, RealtyTrac Inc., a seller of default data, said today. Property values may fall further as foreclosures put even more homes back on the market.

Home prices in 20 U.S. cities tracked by the S&P/Case- Shiller index have dropped 29 percent since their peak in July 2006.

Southern California house and condominium sales climbed 52 percent in March from a year earlier as buyers took advantage of prices 35 percent lower than the same period in 2008, MDA DataQuick, a San Diego-based research company, said yesterday.

Homebuilders nevertheless continue to feel the pinch. Lennar Corp., the fourth-largest in the U.S., reported a wider first-quarter loss than a year earlier and falling orders.

“Low consumer confidence, increased unemployment and growing foreclosure rates negatively impacted new homes sales in most of our markets,” Lennar Chief Executive Officer Stuart Miller said in a statement on March 31. “We continue to adjust our business to adapt to market conditions.”

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

Last Updated: April 16, 2009 10:02 EDT