Nov. 17 (Bloomberg) -- Housing starts in the U.S. tumbled in October to the lowest level in more than six years, raising the prospect that the economy will be further weakened after growing last quarter at the slowest pace since 2003.

Builders broke ground on new dwellings at an annual rate of 1.486 million, down 14.6 percent from September, the Commerce Department said today in Washington. Building permits dropped to a 1.535 million pace, a record ninth straight decline and the lowest since December 1997.

The larger-than-expected drop raises the prospect that the worst isn't over for the residential property market, which is enduring its biggest slump in 15 years. The report also casts doubt on the Federal Reserve's assumption that the housing slide hasn't yet spilled over to the rest of the economy.

``This is a shocking number,'' said Phillip Neuhart, an economist at Wachovia Corp. in Charlotte, North Carolina. ``The market is going to remain weak well into next year.''

St. Louis Fed President William Poole told an audience in Wilmington, Delaware, on Nov. 14 that policy makers are paying ``special attention'' to housing, and that he's concerned about the number of would-be purchases being canceled. A day earlier, minutes of the central bank's October meeting said housing's troubles hadn't translated into a broader economic downturn.

Treasury notes gained after the report, pushing the yield on the benchmark 10-year note down 7 basis points to 4.60 percent as of 4.59 p.m. in New York. The dollar fell, while the Standard and Poor's Supercomposite Homebuilding Index recovered from an initial decline to close 0.2 percent higher at 654.88.

Drag on Growth

``There's still a huge inventory bulge of unsold homes, so I don't think the correction will be over for a while,'' said Chris Low, chief economist at FTN Financial in New York. ``The drag on fourth-quarter growth from housing will be at least as bad as what we saw in the third quarter.''

Housing shaved 1.1 percentage points from economic growth last quarter. Gross domestic product increased 1.6 percent in the three months, the Commerce Department reported on Oct. 27.

``A further correction in the housing market could lead to an even sharper slowdown in the U.S. economy and have spill-over effects abroad,'' International Monetary Fund Managing Director Rodrigo de Rato told reporters today in Melbourne, where he's attending the meeting of the Group of 20 industrial and emerging economies.

Residential construction is likely to drop as much this quarter as last, according to a revised forecast today by economists at Morgan Stanley in New York. They trimmed their estimate from fourth-quarter growth to an annual rate of 2.9 percent, a tenth of a percentage point lower than their previous projection.

Still, the degree of the downturn may eventually benefit the economy, said Morgan Stanley economist Ted Wieseman.

Paring Inventories

``On the positive side, we've probably reached a level of starts that will start to make significant progress in working down the bloated level of inventories of unsold new homes,'' said Wieseman.

The number of housing starts in October was the weakest since July 2000. Starts are down 27 percent from a year earlier.

Economists polled by Bloomberg News forecast starts would fall to a 1.68 million unit pace from an originally reported 1.772 million rate in September, according to the median of 68 estimates, which ranged from 1.58 million to 1.78 million.

Permits were expected to fall to 1.63 million from 1.638 million.

Construction of single-family homes fell 16 percent in October to a 1.177 million rate, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, fell 9.1 percent to an annual rate of 309,000.

Regional Differences

The decline was led by a 26 percent drop in the South. Starts also fell 12 percent in the Midwest and 2.1 percent in the West. Construction rose 31 percent in the Northeast.

The number of homes under construction fell 2.3 percent in October to a 1.292 million pace. Housing completions dropped 3.8 percent to an annual rate of 1.953 million.

The number of housing units authorized, though not yet started, decreased 2.5 percent to 200,200.

Higher mortgage costs and surging prices have put houses out of reach for many buyers.

The 30-year fixed mortgage rate has averaged 6.48 percent during the second half of this year. The rate was 5.87 percent for all of 2005, according to Freddie Mac, the No. 2 purchaser of home loans.

Orders at Toll

Toll Brothers Inc., the largest U.S. luxury home builder, said this month that revenue for the quarter ended Oct. 31 fell 10 percent compared with the same period last year and orders tumbled by more than half.

Chief Executive Officer Robert Toll said on a conference call Nov. 7 that there are no signs that the U.S. housing market will recover soon.

Toll said it will complete between 6,300 and 7,300 homes in the current fiscal year, less than the previous forecast in August of 7,000 to 8,000. The decline is due to cancellations and fewer contracts, the company said.

New-home prices in September declined 9.7 percent from a year earlier, the most since 1970, Commerce reported last month. The prospect of further price declines is keeping many prospective homebuyers on the sidelines, economists said.

Price Pressure

``The excess supply of homes on the market is putting downward pressure on prices and that's making some potential buyers put off a purchase until the negative impact is finished or near finished,'' said David Berson, chief economist of Washington-based Fannie Mae, the world's largest mortgage company.

The number of homes available for sale averaged 556,000 a month this year through September. That compares with a 457,000 monthly average for the same period in 2005 and 351,000 during the past 10 years, according to government figures. The supply of homes in 2006 has been enough to last 6.3 months at this year's sales pace, up from an average of 4.4 months last year.

The Fed raised overnight lending rate 17 straight times between June 2004 and June 2006. Central bankers last month left the benchmark lending rate at 5.25 percent for a third straight meeting.

Growth will pick up this quarter to an annual rate of 2.5 percent from October through December, based on the median forecast of 85 economists surveyed by Bloomberg News from Oct. 30 to Nov. 9. The economy expanded at a 4.1 percent average rate in the first half of this year.

New-home sales will fall to 1.06 million this year from an all-time high of 1.28 million in 2005, the Mortgage Bankers Association said Oct. 24. Next year, sales will drop to 973,000, dipping below 1 million for the first time since 2002, according to the Washington-based trade group.

To contact the reporter on this story: Joe Richter in Washington Jrichter1@bloomberg.net

Last Updated: November 17, 2006 17:12 EST