Sept. 19 (Bloomberg) -- Builders probably started work last month on the fewest new houses in three years as higher mortgage rates discouraged home buyers, economists said ahead of a U.S. government report today.

Housing starts fell to a 1.746 million annual rate last month, according to the median forecast in a Bloomberg News survey, from the previous month's 1.795 million. Building permits probably fell to a 1.74 million pace, from July's 1.763 million, economists said.

A weaker housing market and slumping consumer demand are slowing economic growth to a rate that Federal Reserve policy makers forecast will damp inflation. Economists expect the U.S. Labor Department to report today that producer prices rose at a 0.3 percent rate last month, tame enough to allow Fed policy makers to hold interest rates at 5.25 percent when they meet tomorrow.

``So much of the outlook hinges on the extent of the downturn in the housing market,'' said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis. ``The weaker housing market is pretty well baked into the Fed's outlook.''

The Commerce Department is scheduled to release the housing starts report at 8:30 a.m. in Washington. The Labor Department will put out the producer prices report at the same time.

Estimates for housing starts ranged from 1.62 million to 1.85 million at an annual rate. Total PPI forecasts were from a drop of 0.1 percent to an increase of 0.9 percent.

Excluding food and energy costs, the PPI probably rose at 0.2 percent rate last month, after declining 0.3 percent the month before because of a drop in automobile prices, economists said.

`Significant' Housing Slowdown

The effects of the Fed's 17 straight interest rate increases between June 2004 and June 2006 are ``still playing out'' in the economy, Kansas City Fed Bank President Thomas Hoenig said while speaking to bankers in Copper Mountain, Colorado on Sept. 15. The housing market's slowdown is ``significant,'' Hoenig said. Slower economic growth ``would be healthy and that would allow inflation to continue to moderate over the course of the outlook,'' he said.

The median forecast for housing starts would be the lowest level since a 1.643 million unit annual pace in April 2003, according to Commerce Department data.

Homebuilders' confidence in the housing market dropped this month to a 15-year low, the National Association of Homebuilders said yesterday. The group's confidence index fell to 30, from 33 in August, and sales expectations for the next six months fell to 37, from 41.

Orders Canceled

Atlanta-based Beazer Homes USA Inc. and Los-Angeles-based KB Home reduced forecasts this month, citing cancellations, lower sales and a plunge in new orders.

KB Home predicts an ``increasingly challenging housing market, where the supply of new and resale home inventories has built up in recent months,'' Bruce Karatz, KB Home's chairman and chief executive officer, said in a statement on Sept. 6.

The 30-year fixed mortgage rate has averaged 6.48 percent this year. It was 5.74 percent for the same period of 2005, according to Freddie Mac, the No. 2 purchaser of home loans.

Higher interest rates on top of double-digit home price increases in recent years have pushed people out of the market and are resulting in a slump in home sales. The government will release its report on new home sales for August next week.

The National Association of Realtors forecast on Sept. 7 that total home sales will fall about 8 percent this year and another 2 percent in 2007. Prices for existing homes will rise 2.8 percent in 2006, down from 12.4 percent growth last year, the group said.

   FIRM                       PPI      PPI    Housing   Build
                                       Core    Starts  Permits
   -----------------------------------------------------------
   Number of replies           65       63       62       31
   MEDIAN                     0.3%     0.2%    1.746    1.740
   AVERAGE                    0.3%     0.2%    1.744    1.736
   High Forecast              0.9%     0.4%    1.850    1.795
   Low Forecast              -0.1%     0.1%    1.620    1.650
   Previous                   0.1%    -0.3%    1.795    1.763
   -----------------------------------------------------------
   ABN Amro                   0.4%     0.4%    1.741     n/a
   4CAST Ltd.                 0.3%     0.2%    1.710    1.710
   Action Economics           0.0%     0.2%    1.720    1.795
   AIG Global Invest.         0.2%     0.3%    1.750     n/a
   Alleti Gestielle SGR       0.2%     0.2%    1.740    1.750
   Allianz Dresdner          -0.1%     n/a     1.750     n/a
   Argus Research Corp.       0.3%     0.3%    1.850     n/a
   BMO Capital Markets        0.3%     0.2%    1.740    1.720
   BNP Paribas                0.0%     0.1%    1.760     n/a
   B of A Securities          0.0%     0.2%    1.780     n/a
   Bantleon Bank AG           0.2%     n/a     1.750    1.780
   Barclays Capital           0.3%     0.3%    1.730     n/a
   Bear Stearns               0.3%     0.2%    1.750    1.750
   Briefing.com               0.2%     0.2%    1.765    1.745
   CIBC World Markets         0.3%     0.2%    1.720     n/a
   Citigroup                  0.9%     0.2%    1.700    1.690
   ClearView Economics       -0.1%     0.3%    1.850     n/a
   Commerzbank                0.1%     0.2%    1.750    1.790
   Countrywide SEC            0.2%     0.2%    1.740    1.725
   Credit Suisse              0.1%     0.1%    1.730     n/a
   Cube Financial             0.2%     0.2%     n/a      n/a
   Daiwa Securities           0.4%     0.2%    1.740     n/a
   Danske Bank                0.3%     0.2%     n/a      n/a
   DekaBank                   0.2%     0.2%    1.740    1.730
   Desjardins Group           0.2%     0.3%    1.770    1.745
   Deutsche Bank Research     0.4%     0.2%    1.700    1.690
   Deutsche PostBank          0.3%     0.2%     n/a      n/a
   Dresdner Kleinwort         0.1%     0.2%    1.750     n/a
   DZ Bank                    0.4%     0.3%    1.750    1.750
   First Trust Advisors       0.3%     0.4%    1.770     n/a
   Fortis                     0.3%     0.3%    1.750     n/a
   Global Insight             0.2%     0.3%    1.768    1.718
   Goldman Sachs              0.3%     0.2%    1.741     n/a
   HSBC Markets               0.2%     0.3%    1.700     n/a
   HypoVereinsbank            0.2%     0.2%    1.740    1.725
   ING Financial Markets      0.0%     0.2%    1.710     n/a
   Informa Global Markets     0.4%     0.2%    1.770    1.750
   Insight Economics          0.3%     0.2%    1.730     n/a
   IntesaBci                  0.2%     0.2%    1.750    1.700
   IXIS-CIB                   0.1%     0.1%    1.760     n/a
   J.P. Morgan                0.6%     0.3%    1.730     n/a
   JPMorgan Asset Mg          0.3%     0.2%    1.750    1.710
   Lehman Brothers            0.3%     0.2%    1.750     n/a
   Macroeconomic              0.3%     0.2%    1.770     n/a
   Merrill Lynch              0.4%     0.2%    1.750    1.700
   Mizuho Securities          0.6%     0.2%    1.750     n/a
   Moody's Economy.com        0.3%     0.2%    1.740     n/a
   Morgan Stanley             0.4%     0.2%    1.750     n/a
   National City Bank         0.2%     0.1%    1.730    1.710
   Nomura                     0.4%     0.2%    1.775    1.740
   Nord/LB                    0.0%     0.1%    1.750    1.710
   PNC Bank                   0.1%     0.2%    1.740     n/a
   RBS Greenwich Capital      0.2%     0.2%    1.700     n/a
   Ried, Thunberg & Co.       0.4%     0.1%    1.725     n/a
   Scotia Capital             0.4%     0.2%    1.620    1.650
   Societe Generale           0.2%     0.2%    1.700     n/a
   Stone & McCarthy           0.0%     0.2%    1.740     n/a
   TD Securities              0.3%     0.2%    1.725     n/a
   Terra K Partners           0.3%     0.2%    1.770    1.790
   Thomson/IFR                0.3%     0.2%    1.805    1.750
   UBS Securities LLC         0.2%     0.2%    1.700    1.750
   Univ. of MD                0.2%     0.2%    1.800    1.780
   Wells Fargo                0.0%     0.2%    1.720    1.795
   Westpac Banking            0.1%     0.1%    1.723    1.728
   Wrightson                  0.8%     0.4%    1.770    1.750

To contact the reporter on this story: Courtney Schlisserman in the New York newsroom 1943 or cschlisserma@bloomberg.net

Last Updated: September 19, 2006 00:05 EDT