Aug. 18 (Bloomberg) -- American builders broke ground on more single-family homes in July for a fifth straight month as the real-estate industry stabilized further.

Work began on single-family dwellings at a 490,000 annual pace last month, up 1.7 percent from June and the most since October, the Commerce Department reported today in Washington. Total housing starts unexpectedly fell, depressed by a 13 percent decrease in multifamily units, including condominiums and apartment buildings.

Falling home values and government stimulus efforts such as the tax credit for first-time buyers are boosting sales and stemming the housing meltdown that triggered the financial crisis. Another report showed wholesale prices dropped more than forecast, giving the Federal Reserve more time to foster and sustain a recovery before concern over inflation surfaces.

“In terms of home sales and starts, we have hit bottom and we’re probably in recovery mode,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. “The Fed thinks inflation is going to stay quiet for a long time, which implies it doesn’t have to rush to tighten monetary policy.”

Single-family projects accounted for 84 percent of the market in July and tend to be less volatile from month to month. Multifamily units make up the rest and often bounce up and down as larger projects get started. Last month’s decline in multifamily starts followed a 26 percent fall in June and a 56 percent surge in May.

Better Earnings

U.S. stocks climbed after Target Corp. and Home Depot Inc. earnings topped analyst estimates, while Treasury securities dropped. The Standard & Poor’s 500 Index rose 1 percent to close at 989.67. The S&P builder supercomposite climbed 2.7 percent. The benchmark 10-year note yielded 3.52 percent at 4:16 p.m. in New York, compared with 3.47 percent late yesterday.

Total housing starts declined 1 percent in July to an annual rate of 581,000, the first drop in three months, from a 587,000 pace a month earlier, the Commerce Department report showed.

Starts were projected to rise to a 599,000 annual pace, after an initially reported 582,000 the prior month, according to the median forecast of 70 economists surveyed by Bloomberg News. Estimates ranged from 542,000 to 646,000.

Work on multifamily homes fell to an annual rate of 91,000 from a 105,000 pace in June. Multifamily projects are more vulnerable to credit constraints facing some builders.

Permits Drop

Building permits, a sign of future construction, fell 1.8 percent in July to a 560,000 annual pace from 570,000. Permits for single-family houses climbed 5.8 percent last month, while those for multifamily units dropped 26 percent.

Separately, a Labor Department report today showed wholesale prices fell 0.9 percent, exceeding the median forecast of economists surveyed by Bloomberg, as energy costs receded. Compared with a year earlier, producer prices were down 6.8 percent, the most since records began in 1948.

A record amount of excess capacity will prevent production bottlenecks from developing, indicating wholesale prices will be slow to recover even as the economy improves. A lack of inflation was one reason Fed policy makers last week reiterated a pledge to keep the benchmark interest low for an “extended period.”

‘Comfort’ for Fed

“These inflation numbers provide an enormous amount of comfort for the Fed and it does give them the leeway to continue on with their quantitative easing policies,” said Joseph Brusuelas, a director at Moody’s Economy.com in West Chester, Pennsylvania.

The decrease in housing starts was led by a 16 percent drop in the Northeast, followed by a 1.6 percent decline in the West and 1.4 percent in the South. They rose 13 percent in the Midwest.

Toll Brothers Inc., the largest U.S. luxury homebuilder, reported third-quarter revenue that exceeded analysts’ estimates. New-home contracts rose over the year-earlier quarter for the first time since 2005, Horsham, Pennsylvania- based Toll said on Aug. 12.

“Although some of our markets are still stuck in the mud, many are improving,” Chairman and Chief Executive Officer Robert Toll said on a conference call. “It does feel as if the fence sitters are looking for reasons to jump in.”

Government Efforts

Government efforts to stoke the housing market have included offering lenders incentives to modify the terms of delinquent mortgages; Fed purchases of mortgage-backed securities to free up funding for home loans; and an $8,000 tax credit for first-time home buyers for transactions completed before Dec. 1.

Foreclosures remain a threat to builders. About $3.4 trillion worth of houses are at risk of default because the owners owe more than the property is worth, Santa Ana, California-based First American CoreLogic said last week.

Meanwhile, foreclosure-driven declines in prices are lifting sales. Homeowners cut asking prices by $27.8 billion in the year through Aug. 1, according to Trulia Inc., a San Francisco-based real estate data provider.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net; Bob Willis in Washington bwillis@bloomberg.net

Last Updated: August 18, 2009 16:21 EDT