Aug. 16 (Bloomberg) -- Builders in the U.S. started work on the fewest homes in a decade in July as the industry showed no sign of recovering from an 18-month recession.

The greater-than-forecast 6.1 percent decrease to an annual rate of 1.381 million followed a 1.47 million pace in June, the Commerce Department said today in Washington. Building permits also fell to a 10-year low.

Stock markets worldwide have tumbled on concern subprime mortgage defaults will bankrupt more lenders and destabilize the financial system. U.S. consumer spending, which makes up more than two-thirds of the economy, may weaken as falling real- estate prices and limits on borrowing prevent owners from tapping home equity, economists said.

``Even the most ambitious homebuilders will think twice about initiating new projects,'' said Lindsey Piegza, an analyst at FTN Financial in New York. ``Falling prices, sluggish demand, and dwindling mortgage credit availability will continue to weigh heavily on residential construction.''

Economists had forecast a decline in housing starts to a 1.4 million unit pace, from an originally reported 1.467 million in June, according to the median of 75 forecasts in a Bloomberg News survey. Estimates ranged from 1.35 million to 1.47 million. Construction was down 21 percent from July 2006.

Permits, a sign of future construction, decreased 2.8 percent to a 1.373 million annual pace, the lowest since October 1996. They were also forecast to drop to a 1.4 million rate, according to the survey median, with projections ranging from 1.375 million to 1.441 million.

Treasuries Gain

U.S. Treasury notes, which were rising before the report, stayed higher after the release. The yield on the benchmark 10- year note was 4.68 percent at 9:08 a.m. in New York, compared with 4.73 percent late yesterday. Stock index futures were down, following declines worldwide on concern the credit crunch will sap economic growth.

First-time applications for jobless benefits unexpectedly rose last week, a Labor Department report also showed. Initial claims rose 6,000 to 322,000 in the week ended Aug. 11, the highest in two months.

William Poole, president of the St. Louis Federal Reserve Bank, said in an interview yesterday that the subprime mortgage rout doesn't threaten economic growth, and only a ``calamity'' would justify an interest-rate cut now.

Poole, who confers regularly with regional business contacts, said in an interview yesterday that ``no one has called up and said the sky is falling.'' The best course is for officials to assess economic figures, including the August jobs report, when they next convene on Sept. 18, he added.

Single-Family Slumps

Construction of single-family homes slumped 7.3 percent in July to a 1.07 million rate, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, decreased 1.6 percent to an annual rate of 311,000.

The drop in starts was led by an 11 percent decline in the South. Construction fell 3.7 percent in the West and 1.3 percent in the Northeast. They rose 2.6 percent in the Midwest.

The number of homes under construction decreased 1.6 percent to a 1.143 million pace. Completions of dwellings fell 0.1 percent to an annual rate of 1.512 million.

The number of housing units authorized, but not yet started, decreased 6 percent to a 194,400 annual pace, today's data showed.

Confidence Falls

The slump in construction, which has slowed growth without stopping the expansion, shows no sign of abating. Confidence among homebuilders fell to a 16-year low this month as cancellations and lending restrictions took a toll, according to a report yesterday from the National Association of Home Builders/Wells Fargo.

Buyers are delaying purchases in hopes of further price declines, and tougher restrictions have shut some borrowers out of the mortgage market, economists said. Rising foreclosures will probably throw more properties back on the market.

Subprime mortgage defaults are already the highest in a decade, according to figures from Friedman Billings Ramsey Group Inc., an Arlington, Virginia-based real estate investment trust.

Ongoing declines in housing, new lending restrictions and volatile financial markets have raised concerns about growth ``somewhat,'' Fed policy makers said in a statement after their Aug. 7 meeting. They held the benchmark interest rate unchanged at 5.25 percent and reiterated that inflation is the biggest risk for the economy.

The Standard & Poor's 500 stock market index is down almost 10 percent since reaching a record on July 19 on investor concern the subprime crisis would lead to a widening credit crunch.

Builder Profits

Toll Brothers Inc., the largest U.S. luxury-home builder, said Aug. 8 that third-quarter revenue dropped 21 percent as the new credit restrictions reduced the pool of potential buyers.

``With the uncertainties roiling the mortgage markets right now, the pace of home sales could slow further until the credit markets settle down and sort themselves out,'' Robert Toll, chief executive officer of the Horsham, Pennsylvania-based company, said in a conference call with analysts. ``If the economy gets worse, I think that you could see a much lengthier downturn for housing.''

Residential investment fell at an annual rate of 9.3 percent in the second quarter, after contracting by 16 percent in the previous three months. That took away 0.5 percentage point from the quarter's economic growth, compared with a 0.9 percentage point reduction in the January to March period.

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

Last Updated: August 16, 2007 09:26 EDT