Oct. 16 (Bloomberg) -- Confidence among U.S. homebuilders fell to a record low in October as declining prices, higher mortgage rates and loan restrictions scared off buyers.

The National Association of Home Builders/Wells Fargo index of builder sentiment fell to 18, more than economists had forecast, from 20 in September, the Washington-based association said today. Levels lower than 50 mean most respondents view conditions as poor. The index averaged 42 last year.

Bigger discounts and sweetened incentives have yet to revive demand as buyers wait for even bigger bargains, builders said. The report underscores Federal Reserve Chairman Ben S. Bernanke's warning yesterday that the housing slump will constrain economic growth into next year.

``The contraction in housing is going to be deeper and more prolonged than many people thought,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York, who correctly forecast the decline. ``It doesn't look like home sales are reacting to discounted prices. A lot of buyers will wait until the market hits bottom.''

The confidence index was forecast to drop to 19 this month, according to the median estimate of 38 economists surveyed by Bloomberg News. Projections ranged from 17 to 21.

Stock prices initially extended losses after the report. The Dow Jones Industrial Average was down 60 points, or 0.4 percent, at 1:38 p.m. in New York. The Standard & Poor's Supercomposite Homebuilding Index dropped 8.5 points to 341.0.

`Significant' Risk

Treasury Secretary Henry Paulson today said the decline in the housing market is ``the most significant current risk'' to the economy and called for an ``aggressive plan'' by mortgage lenders to head off foreclosures.

The homebuilders' group started tracking sentiment in 1985. The survey asks builders to characterize current sales as ``good,'' ``fair'' or ``poor,'' and to gauge prospective buyers' traffic. The survey also asks participants to assess the outlook for the next six months.

The group's measure of single-family home sales fell to 18, from 20 in September. A measure of sales expectations for the next six months held at 26, while the index of buyer traffic fell to 15 from 17.

A meltdown in subprime-mortgage lending during August probably extended the real-estate slump for many more months, economists said. Reports last week highlighted housing's dim prospects.

Realtor Forecasts

New-home sales may decline 24 percent to a 10-year low of 804,000 and existing home sales will fall 11 percent, the National Association of Realtors said Oct. 10. The report marked the 10th time this year the Chicago-based group lowered some portion of its housing and economic forecast. The median new- home price may decline 2.1 percent to $241,400, the group said.

Dallas-based Centex Corp., the fourth-largest U.S. homebuilder, on Oct. 12 said it will generate less cash from sales than forecast, and Moody's Investors Service cut the credit ratings of Lennar Corp., Centex and Pulte Homes Inc. to junk. Moody's cited the rising inventory of unsold homes, tighter mortgage lending standards and falling property prices.

``We expect the housing environment to remain challenging,'' D.R. Horton Inc. Chairman Donald Horton said in a statement today. ``Buyers continued to approach the home buying decision cautiously.''

Fort Worth, Texas-based D.R. Horton, the second-largest U.S. homebuilder, said orders in the fiscal fourth quarter plunged to the lowest in almost six years as customers canceled and banks restricted lending.

Cancellations

Cancellations are adding to already swollen supplies of unsold homes. A government report last month showed inventories rose to 8.2 months at the August sales pace, nearly double the average of the past decade.

The confidence index fell in three of four regions this month. It declined four points in the West, to 14 from 18. The index dropped to 26 in the Northeast and to 21 in the South, both a point lower than in September. It rose to 15 from 13 in the Midwest, the first gain for the region since February.

Construction companies are delaying new projects. The Commerce Department said Sept. 19 that builders began work on the fewest homes in 12 years during August. Building permits also dropped to the lowest since 1995.

Some builders have boosted discounts to attract buyers. Red Bank, New jersey-based Hovnanian Enterprises Inc. held a three- day sale last month to reduce the glut of unsold homes. The builder said the event exceeded expectations and increased traffic at its developments nationwide.

``Builders in the field are reporting that, while their special-sales incentives are attracting interest among consumers, many potential buyers are either holding out for even bigger deals or hesitating due to concerns'' about reports of falling home prices, Brian Catalde, president of the builders group, said in a statement.

To contact the reporter on this story: Joe Richter in Washington at jrichter1@bloomberg.net

Last Updated: October 16, 2007 13:40 EDT