July 18 (Bloomberg) -- Builders in the U.S. unexpectedly started work on more homes last month while permits for future construction fell to the lowest level in a decade, suggesting a recovery from the housing slump may not be quick.

Housing starts rose 2.3 percent to an annual rate of 1.467 million, led by an increase in apartment buildings, the Commerce Department said today in Washington. Building permits fell 7.5 percent to a 1.406 million rate.

Rising mortgage rates and stricter lending rules are impeding a rebound in housing, even as builders lower prices and add more incentives to draw buyers. A glut of unsold properties will probably continue to drag down construction and the economy for the rest of the year, economists said.

``We're seeing ongoing softness in the housing data,'' said James Shugg, senior economist at Westpac Banking Corp. in London, whose forecast for a decline in permits was the most accurate among 45 economists surveyed by Bloomberg News.

Consumer prices in the U.S. rose 0.2 percent in June, the smallest gain in five months, as gasoline prices retreated from a record, a separate government report showed today.

The increase in the consumer price index followed a 0.7 percent rise in May, the Labor Department said. Core prices, which exclude food and energy, rose 0.2 percent and were up 2.2 percent from a year earlier.

Treasury notes were little changed as investors awaited congressional testimony by Federal Reserve Chairman Ben S. Bernanke later this morning. The yield on the benchmark 10-year note rose 1 basis point, or 0.01 percentage point, to 5.06 percent at 9:31 a.m. in New York.

Subprime Mortgages

Yesterday, the central bank said it will team up with state regulators to strengthen supervision and enforcement of subprime mortgage lenders and brokers.

Housing starts in May were revised down to a 1.434 million rate. Economists forecast starts in June would fall to a 1.45 million rate, from a previously reported 1.474 million for May, according to the median of 73 projections in a Bloomberg News survey. Estimates ranged from 1.38 million to 1.53 million.

Permits were forecast to fall to a 1.48 million pace, from 1.52 million, according to the survey.

Starts were down 19 percent in the 12 months ended in June.

Construction of single-family homes fell 0.2 percent last month to a 1.15 million rate. Work on multifamily homes, such as townhouses and apartment buildings, rose 13 percent to an annual rate of 316,000.

West Leads Gains

The rise in starts was led by a 9 percent increase in the West. Construction also rose in the South, by 2.4 percent. It fell by 3.7 percent in the Midwest and declined by 2.4 percent in the Northeast.

Residential investment has subtracted from economic growth every quarter since the last three months of 2005. Spending on home-construction projects fell at a 16 percent annual rate last quarter and subtracted 0.9 percentage point from growth.

Home Depot Inc., the world's largest home-improvement retailer, last week cut its forecast for annual profit. Chief Financial Officer Carol Tome said in an interview last week that housing is likely to remain weak.

``No news is coming to our attention that is giving us any comfort that there'll be a recovery this year,'' Tome said.

A glut of unsold homes suggests the slump is not over.

There were enough homes on the market in May to satisfy 7.1 months' worth of demand at the current sales pace, the government said last month. The supply of existing homes was 8.9 months, the most in almost 15 years.

Values Slide

Home values in 20 U.S. metropolitan areas fell 2.1 percent in April from the same month a year earlier, according to a report last month by S&P/Case-Shiller. It was the biggest drop in at least six years.

``Falling prices will allow the market to clear eventually,'' Christopher Low, chief economist at FTN Financial in New York, said before the report. ``We have seen the worst of the direct impact from housing investment on the economy.''

Even with the recent declines in prices, hurdles remain for potential buyers. Some banks, reacting to an increase in defaults among subprime mortgage holders, have made it more difficult for borrowers to qualify for mortgages. In addition, rising mortgage rates are making loans more expensive.

The average rate on a 30-year fixed mortgage was 6.66 percent in June, up from 6.26 a month earlier, according to figures from Freddie Mac, the No. 2 buyer of U.S. mortgages.

The National Association of Realtors, on July 11, reduced its sales forecast for this year for a seventh straight month and projected that sales of single-family homes will probably fall in 2008 to their lowest level since 1995.

Home Sales

Reports on June sales of new and existing homes are due next week. Existing home sales fell to the lowest level in almost four years in May, according to the National Association of Realtors, and purchases of new homes dropped 1.6 percent.

Confidence among homebuilders fell this month to the lowest level in 16 years, suggesting the housing market may continue to stumble. The National Association of Home Builders/Wells Fargo sentiment index declined to 24 this month, the lowest since January 1991, from 28 in June, the Washington-based association said yesterday. Readings less than 50 mean most respondents view conditions as poor.

While housing likely will remain in the doldrums in coming quarters, its negative impact on economic growth may wane, economists said. Federal Reserve Bank of San Francisco President Janet Yellen said on July 12 that ``as housing's negative effect eases up,'' the pace of economic growth may ``pick up a bit in 2007 to a rate just below potential.''

To contact the reporter on this story: Courtney Schlisserman in the New York newsroom cschlisserma@bloomberg.net

Last Updated: July 18, 2007 09:56 EDT