Sept. 20 (Bloomberg) -- U.S. housing starts fell 1.3 percent last month, keeping construction on pace to surpass last year's total, which was the highest since 1978, a government report showed.

Builders broke ground on 2.009 million housing units at an annual rate in August compared with a revised 2.035 million the month before, the Commerce Department said today in Washington. Building permits, a sign of future construction, fell to a 2.124 million annual rate from 2.171 million in July.

Job growth and 30-year fixed mortgage rates that have held below 6 percent most of this year fueled demand at builders such as Toll Brothers Inc., helping boost economic expansion before Hurricane Katrina struck the Gulf Coast Aug. 29. Economists expect Federal Reserve policy makers, meeting later today, to raise interest rates to keep inflation from accelerating.

``Starts are still close to an all-time high, which is consistent with months of record housing sales,'' Chris Low, chief economist at FTN Financial in New York, said before the report. ``Starts are still low relative to sales, so it appears they're going to be strong for the next few months.''

Economists expected starts to decline to a 2.025 million annual rate last month, the median of 59 forecasts in a Bloomberg News survey, from a 2.042 million rate originally reported for July. Estimates ranged from 1.975 million to 2.15 million.

Permits vs. Starts

Permits were expected to fall to a 2.130 million annual rate from 2.171 million in July. The rate of permits has been outpacing that of starts since March, suggesting either that companies aren't able to build homes fast enough to keep up with demand or that builders are cautious about starting homes that don't have buyers, economists said.

Backlogs, or construction that was authorized but not yet begun, rose 5.7 percent to 238,700 units, and were 22 percent higher than in August 2004.

New construction of single-family homes rose 0.1 percent last month to a 1.709 million-unit pace. Starts of townhouses, apartments and other multifamily dwellings fell to a 300,000 annual rate from 328,000 in July.

Rainfall may also have held down starts in August, according to economists including Mike England at Action Economics LLC in Boulder, Colorado. August was ninth-wettest season on record in the South, and the sixth wettest in the central U.S., according to the National Climatic Data Center in Asheville, North Carolina.

`Minimal' Hurricane Impact

The hurricane had ``minimal'' effect on housing starts during the month, the Commerce Department said.

Starts fell in the Midwest by 5.2 percent to a 346,000-unit rate. They fell in the Northeast by 4.1 percent to a 187,000-unit rate and fell 6.6 percent in the South to a 915,000-unit rate. In the West starts rose by 13 percent to a 561,000-unit rate.

The number of houses already under construction last month rose 1.0 percent to 1.359 million. Housing completions fell 0.2 percent to 1.860 million. Single-family completions fell 4.7 percent to 1.551 million.

New home sales reached a record annual rate of 1.41 million in July, according to the Commerce Department, and the sales pace of previously owned homes that month was the third-fastest on record. New home sales are expected to reach 1.28 million this year, up from 1.2 million last year, according to a forecast from the National Association of Realtors, an industry trade group.

Fed's Actions

The Federal Reserve's 10 straight increases in the overnight lending rate have done little to boost long-term borrowing costs. The average rate on a 30-year fixed mortgage was 5.66 percent in July and 5.82 percent in August, according to Freddie Mac, the second-largest mortgage buyer in the U.S. The rate has risen above 6 percent in only two weeks during the past year, and has stayed within a percentage point of the 40-year low of 5.21 percent reached in July 2003.

The Federal Reserve will probably raise its key interest rate by a quarter point to 3.75 percent later today, the 11th consecutive increase, according to a Bloomberg survey of economists.

Increased hiring and rising incomes are also giving new-home buyers the wherewithal to afford homes even as prices surge, economists said. Employers added 169,000 jobs in August, and the unemployment rate fell to 4.9 percent, the lowest in four years. Personal incomes were up 6.3 percent in July from a year earlier, compared with a gain of 5.9 percent for all of last year.

Driving Forces

``The driving forces of demand for new homes are job growth and population growth,'' said Christopher Clemente, chief executive officer of Reston, Virginia-based Comstock Homebuilding Companies Inc. ``Traffic at our projects remains healthy.''

Toll Brothers, the largest builder of luxury homes, said its backlog of houses ordered rose 38 percent to 9,490 during the three months ended July 31. Toll is based in Horsham, Pennsylvania.

There are signs that some buyers are straining to afford a home, and home price gains may be starting to slow. Hovnanian Enterprises Inc., New Jersey's largest homebuilder, said Sept. 7 that quarterly earnings missed analysts' estimates and gains in sale prices had ``moderated.''

U.S. mortgage delinquencies rose for the first time in a year during the second quarter, and will likely increase more in the wake of Hurricane Katrina, the Mortgage Bankers Association said last week.

Caution Urged

Fed Governor Mark Olson on Sept. 16 urged U.S. lenders to use care with ``non-traditional'' types of home mortgages such as interest-only and adjustable-rate loans, because some borrowers will be ``severely challenged'' to repay them if interest rates rise. Olson made the remarks at a Middle Tennessee State University conference in Murfreesboro.

The surge in energy and building materials prices since Hurricane Katrina struck the U.S. Gulf Coast on Aug. 29 may make builders more cautious in coming months. Crude oil, natural gas, gasoline and heating oil have hit records since Katrina made landfall.

The National Association of Home Builders/Wells Fargo's index of builder confidence this month fell to the lowest since July 2003, the Washington-based association said yesterday. The decline was the third in a row.

``Many builders appear to be taking on a more cautious attitude because of uncertainties in the economy and this post- Katrina environment, particularly with regard to sales expectations in the near term,'' Dave Wilson, president of the builders' association, said in a statement.

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

Last Updated: September 20, 2005 08:30 EDT