U.S. Housing Starts Unexpectedly Climb in October (Update4)

Nov. 20 (Bloomberg) -- Housing starts in the U.S. unexpectedly rose in October as a jump in work on condominium projects outstripped the weakest construction of single-family homes in 16 years.

Builders broke ground on 1.229 million homes at an annual rate last month, up 3 percent from September, the Commerce Department said in Washington. Permits, a gauge of future construction, fell 6.6 percent to a 1.178 million pace, the lowest since 1993.

Sales of single-family homes are dropping as potential buyers wait for prices to fall even more and some banks make it more difficult to get mortgages. Demand is declining as fast as construction, preventing builders from trimming inventories and suggesting the real-estate recession will linger into 2008.

``All of us are ratcheting down our expectations for the bottom of the housing sector and I don't think we're there yet,'' said David Resler, chief economist at Nomura Securities International Inc. in New York.

Construction of single-family homes fell 7.3 percent to the lowest since October 1991. Multifamily home building surged 44 percent.

Treasury notes rose after the report before retreating later, while the dollar remained near a record low against the euro.

Exceeding Estimates

Starts were projected to fall to a 1.17 million unit pace, from an originally reported 1.191 million in September, according to the median forecast of 75 economists polled by Bloomberg News. Estimates ranged from 1.05 million to 1.25 million.

Permits were forecast to drop to a 1.2 million pace, according to the survey median, with projections ranging from 1.1 million to 1.324 million.

Construction of single-family homes dropped to an 884,000 pace, while work on multifamily homes rose to a 345,000 annual rate.

The increase in starts was led by a 21 percent jump in the Midwest. Construction rose 8.5 percent in the Northeast and 5.8 percent in the West. Starts fell 4.6 percent in the South.

A report yesterday added to evidence that housing was far from recovery. The National Association of Home Builders/Wells Fargo confidence index held at a record low of 19 in November.

Toll Brothers Inc., the largest U.S. luxury homebuilder, said Nov. 8 that fourth-quarter revenue fell 36 percent and the cancellation rate rose to the highest ever.

``We do think that this is worse than it was in '88 through '90,'' Chairman Robert Toll said on a conference call. ``We can't predict how long this down period will last.''

Subtracting From Growth

Declines in home construction have reduced growth since the start of 2006 and detracted 1.1 percentage points in the third quarter. Homebuilding will drop at a 22 percent annual pace this quarter, the most since the last three months of 1981, according to a forecast by economists at Lehman Brothers Holdings Inc.

Foreclosures doubled in September from a year earlier as subprime borrowers struggled to make payments on adjustable-rate mortgages, RealtyTrac Inc. said Oct. 11.

Rising foreclosures and falling sales are adding to inventories and pushing down prices. The Case-Shiller index of home prices in 20 major cities declined 4.4 percent in the 12 months though August, the most since records began in 2001.

Freddie Mac Loss

Freddie Mac, the second-biggest buyer of U.S. mortgages, today posted its largest-ever quarterly loss and said it may cut its dividend and raise capital to weather ``significant deterioration'' in the housing market. A slump in the value of mortgages reduced core capital to $600 million more than its regulatory requirements, prompting Freddie Mac to seek more money.

Declining home equity also deprives some owners of the cash used to buy other goods and services or fund home-improvement projects.

Lowe's Cos., the second-largest home-improvement retailer, yesterday said third-quarter profit declined 10 percent and reduced its annual profit forecast for the second time in two months because of the housing slump.

This week traditionally marks the start of the holiday shopping season and the National Retail Federation is forecasting the smallest sales gain in five years. In anticipation of weak demand, Bentonville, Arkansas-based Wal-Mart Stores Inc., the world's largest retailer, began offering holiday discounts two weeks early.

Spending Slowdown

Consumer spending, which accounts for about 70 percent of the economy, will grow at a 2 percent annual rate in the fourth quarter, down from 3 percent in the prior three months, according to the median forecast of economists surveyed by Bloomberg earlier this month. The economy will grow at a 1.5 percent rate, less than half the reported 3.9 percent third-quarter pace, the survey shows.

Federal Reserve Chairman Ben S. Bernanke told a congressional hearing Nov. 8 that policy makers expected growth to ``slow noticeably'' in the current quarter and remain ``sluggish'' in the first half of 2008. ``The contraction in housing-related activity seemed likely to intensify,'' he said.

Later Today, the Fed will issue the minutes of its Oct. 31 meeting. The report will be the first to contain expanded forecasts for growth and inflation that form part of the central bank's drive to improve transparency in communications.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net