Nov. 18 (Bloomberg) -- Confidence among U.S. homebuilders in November dropped to the lowest level since record-keeping began in 1985, a sign that the deepening credit crisis is preventing prospective buyers from purchasing new homes.

The National Association of Home Builders/Wells Fargo index of builder confidence decreased to 9, lower than forecast, from 14 in October, the Washington-based association said today. A reading less than 50 means most respondents view conditions as poor.

Banks are reluctant to offer mortgages as foreclosures and delinquencies mount, increasing the likelihood that the housing recession will extend into a fourth year. The total number of houses on the market is near an all-time high, hurting builder profits as property values plummet.

“The November results are eye-poppingly bad,” Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said in a note to clients. “The magnitude of the housing bubble was unprecedented and the corrective process promises to be a long and painful one.”

Stocks, which had surrender earlier gains before the report, fell and Treasuries rose. The Standard & Poor’s 500 index was down 1 percent to 842.06 at 1:33 p.m. in New York. The builder supercomposite fell 2.4 percent to 169.14.

The builder confidence index was forecast to be unchanged at 14 this month, according to the median estimate of 40 economists surveyed by Bloomberg News. Projections ranged from 12 to 16.

Prices Falling

Home prices fell in four out of every five U.S. cities in the third quarter, a record spurred by distressed foreclosure sales across the country, the Chicago-based National Association of Realtors also said today. The median price of a U.S. home fell 9 percent from a year earlier and sales of properties with mortgages in default accounted for at least a third of all transactions.

“We are in a crisis situation,” NAHB chairman Sandy Dunn, a builder from Point Pleasant, West Virginia, said in a statement. “Tremendous economic uncertainties have driven consumers from the housing market, and it’s going to take some major incentives to bring them back.”

A government report earlier today showed inflation concerns are waning as the U.S. economy contracts. Prices paid to American producers fell a record 2.8 percent in October, the Labor Department said in Washington.

The builders’ confidence gauge, which was first published in January 1985, averaged 27 last year.

Sales, Traffic Slump

The confidence survey asks builders to characterize current sales as “good,” “fair” or “poor” and to gauge prospective buyers’ traffic. The survey also asks participants to gauge the outlook for the next six months.

The group’s index of current single-family home sales fell to 8 this month from 14 in October. The index of buyer traffic decreased to 7 from 11. A measure of sales expectations for the next six months were unchanged at 19.

Confidence slipped in all four regions, led by a slump in the Midwest.

U.S. foreclosure filings in October rose 25 percent from a year earlier, compared with average monthly gains of about 50 percent so far in 2008, after California passed a law delaying foreclosures for some borrowers, according to RealtyTrac, a seller of foreclosure data. Filings increased 5 percent from September.

Record-Low Starts

The Commerce Department may report tomorrow that builders in September began work on 780,000 homes at an annual rate, the fewest since record-keeping began in 1959, according to the median estimate in a Bloomberg survey. Building permits probably fell to the lowest level since 1981.

Homebuilders are struggling as property values continue to drop and banks remain reluctant to offer mortgages.

“It’s safe to say October was a significant drop from September, which was an awful month and an awful period for everyone,” Ara Hovnanian, chief executive of Hovnanian Enterprises, New Jersey’s largest homebuilder, said in a Bloomberg Television interview Nov. 13.

“When our sales drop, and when we see it in the public arena, that means the starts and the closings that are going to come in the next couple of months are going to be far worse than what’s out there today,” he added.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

Last Updated: November 18, 2008 13:36 EST