Nov. 17 (Bloomberg) -- Housing starts in the U.S. tumbled in October to the lowest level in more than six years, as waning home sales and swollen inventories discouraged new projects.

Builders broke ground on new dwellings at an annual rate of 1.486 million, down 14.6 percent from September, the Commerce Department said today in Washington. Building permits dropped to a 1.535 million pace, a record ninth straight decline and the lowest since December 1997.

The bigger-than-expected drop suggests home construction may continue to sap economic growth into the fourth quarter. Federal Reserve Bank of St. Louis President William Poole this week said policy makers are paying ``special attention'' to housing, and that he is concerned about the number of would-be purchases being canceled.

``This is a shocking number,'' said Phillip Neuhart, an economist at Wachovia Corp. in Charlotte, North Carolina. ``The market is going to remain weak well into next year.''

The yield on the benchmark 10-year Treasury note fell 2 basis points to 4.64 percent at 9:36 a.m. in New York. Stocks fell and the dollar pared its advance against the euro. The Standard and Poor's Supercomposite Homebuilding Index dropped 1.5 percent to 645.95.

Economists polled by Bloomberg News forecast starts would fall to a 1.68 million unit pace from an originally reported 1.772 million rate in September, according to the median of 68 estimates, which ranged from 1.58 million to 1.78 million.

Weakest in Six Years

The number of housing starts in October was the weakest since July 2000. Starts are down 27 percent from a year earlier.

Permits were expected to fall to 1.63 million from 1.638 million.

Construction of single-family homes fell 16 percent in October to a 1.177 million rate, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, fell 9.1 percent to an annual rate of 309,000.

The decline was led by a 26 percent drop in the South. Starts also fell 12 percent in the Midwest and 2.1 percent in the West. Construction rose 31 percent in the Northeast.

The number of homes under construction fell 2.3 percent in October to a 1.292 million pace. Housing completions dropped 3.8 percent to an annual rate of 1.953 million.

The number of housing units authorized, but not yet started, decreased 2.5 percent to 200,200.

Higher mortgage costs and surging prices have put houses out of reach for many buyers.

Mortgage Rates

The 30-year fixed mortgage rate has averaged 6.48 percent during the second half of this year. The rate was 5.87 percent for all of 2005, according to Freddie Mac, the No. 2 purchaser of home loans.

Toll Brothers Inc., the largest U.S. luxury home builder, said this month that revenue for the quarter ended Oct. 31 fell 10 percent compared with the same period last year and orders tumbled by more than half.

Chief Executive Officer Robert Toll said on a conference call Nov. 7 that there are no signs that the U.S. housing market will recover soon.

Toll said it will complete between 6,300 and 7,300 homes in the current fiscal year, less than the previous forecast in August of 7,000 to 8,000. The decline is due to cancellations and fewer contracts, the company said.

New-home prices in September declined 9.7 percent from a year earlier, the most since 1970, Commerce reported last month. The prospect of further price declines is keeping many prospective homebuyers on the sidelines, economists said.

`Excess Supply'

``The excess supply of homes on the market is putting downward pressure on prices and that's making some potential buyers put off a purchase until the negative impact is finished or near finished,'' said David Berson, chief economist of Washington-based Fannie Mae, the world's largest mortgage company.

The number of homes available for sale averaged 556,000 a month this year through September. That compares with a 457,000 monthly average for the same period in 2005 and 351,000 during the past 10 years, according to government figures. The supply of homes in 2006 has been enough to last 6.3 months at this year's sales pace, up from an average of 4.4 months last year.

``Further adjustment in the housing market appeared likely,'' the Fed said in minutes of its gathering on Oct. 24-25 released in Washington yesterday. ``Many participants expressed concern that ongoing developments in the housing market could have a more pronounced impact on consumer and other spending.''

Fed Policy

The Fed raised overnight lending rate 17 straight times between June 2004 and June 2006. Central bankers last month left the benchmark lending rate at 5.25 percent for a third straight meeting.

Home construction shaved 1.12 percentage points off of third-quarter gross domestic product, the most since the final three months of 1981. The economy expanded at a 1.6 percent annual rate last quarter, the slowest in more than three years.

Growth will pick up this quarter to an annual rate of 2.5 percent from October through December, based on the median forecast of 85 economists surveyed by Bloomberg News from Oct. 30 to Nov. 9. The economy expanded at a 4.1 percent average rate in the first half of this year.

New-home sales will fall to 1.06 million this year from an all-time high of 1.28 million in 2005, the Mortgage Bankers Association said Oct. 24. Next year, sales will drop to 973,000, dipping below 1 million for the first time since 2002, according to the Washington-based trade group.

Recent reports suggesting that the deterioration in housing was starting to moderate had eased concerns among some economists.

U.S. mortgage applications rose last week as a gauge of home purchase loans climbed to the highest since early July, the Mortgage Bankers Association said.

New-home sales in the U.S. unexpectedly rose for a second month in September as selling prices declined by the most since 1970, the Commerce Department said Oct. 26.

To contact the reporter on this story: Joe Richter in Washington Jrichter1@bloomberg.net

Last Updated: November 17, 2006 09:42 EST