June 19 (Bloomberg) -- Confidence among U.S. homebuilders dropped to an 11-year low this month amid a glut of unsold homes and rising mortgage rates.

The National Association of Home Builders/Wells Fargo's index of builder confidence declined to 42, the lowest since April 1995, from 46 in May, the Washington-based association said today. A number below 50 means pessimists outnumber optimists.

Industry groups say home sales will fall in 2006 for the first time in six years, and builders such as KB Home are cutting profit forecasts. The drop in confidence, along with declining housing starts, is evidence that 16 consecutive interest-rate increases by the Federal Reserve are starting to cool the economy, economists said.

``The Fed has been aiming at this,'' said Zoltan Pozsar, an economist at Moody's Economy.com in West Chester, Pennsylvania. ``Housing, home construction and sales are what has kept overall growth above potential, so growth had to slow, and the Fed's primary goal over the last two years has been to normalize policy rates and push growth down to its potential.''

The Standard and Poor's Supercomposite Homebuilding Index fell 2.2 percent at of 3:16 p.m. in New York, bringing its decline for the year to 31 percent.

Los Angeles-based KB Home, the fifth-largest homebuilder, on June 15 said profit will grow at the slowest pace in five years as higher mortgage rates put a chill on demand.

``These conditions will likely persist at least through the remainder of 2006,'' Chief Executive Officer Bruce Karatz said in a statement.

Sales Expectations

Today's report showed that a measure of sales expectations for the next six months fell to 50 from 55. The index of buyer traffic declined to 29 from 33. Both were the lowest since March 1995. The builders group's gauge of current sales fell to 47, the lowest since May 1995, from 50.

David Seiders, chief economist at the National Association of Home Builders, said the decline ``is not inconsistent with the reasonably orderly cooling-down process we're projecting for home sales and single-family housing starts in 2006.''

The Realtors forecast June 6 that new home sales will fall 13.4 percent this year to 1.11 million, the third-best on record, from a high of 1.28 million last year. Housing starts may decline 6.2 percent to 1.94 million from 2.07 million last year.

Rising mortgage rates are discouraging potential buyers. The average rate on a 30-year-fixed mortgage was 6.63 percent last week, according to Freddie Mac, the No. 2 source of money for U.S. home loans. That compares with an average of 6.60 percent in May and 5.6 percent in June of 2005.

`Home-Flipping Culture'

The housing slowdown is prompting an exodus of speculators, who buy homes and quickly ``flip'' them for a profit, said John Herrmann, director of economic commentary at Cantor Fitzgerald LP in New York.

``The home-flipping culture that we've had in the last three years, that is clearly being rapidly eliminated,'' he said. There is also a ``slowing of traffic by people looking for second and third homes.''

The number of homes available for sale is 35 percent higher than it was a year ago, according to a Wachovia Securities report on June 6 by analyst Carl Reichardt. The report said the housing slowdown is ``worse than we thought.'' There were 565,000 new homes for sale at the end of April, a record.

Builder confidence fell in all four regions this month, with the biggest decrease occurring in the Northeast, which plunged to 40 from 47. The Midwest declined to 25 from 29, the South fell to 49 from 51 and the West declined one point to 61.

Federal Reserve

A two-year cycle of interest-rate increases by the Federal Reserve has pushed up bond yields and the mortgage rates tied to them.

The Fed has increased the nation's benchmark lending rate to 5 percent from 1 percent since June 2004, and almost all economists expect it to raise an additional quarter-point at its next policy meeting June 29.

Federal Reserve Bank of St. Louis President William Poole on June 16 told reporters in Seoul that U.S. inflation is above his comfort zone. He was at least the ninth official from the Fed in the previous two weeks to express concern about inflation, heightening expectations that the Fed may continue raising rates after its June meeting.

Sales of existing homes, which make up about 85 percent of all housing sales, are forecast to drop 6.8 percent to 6.6 million this year from a record 7.08 million in 2005, the Realtors' group said.

The group is forecasting median price gains of 5.3 percent this year for all housing types, compared with 13 percent in the fourth quarter from a year earlier, according to the Office of Federal Housing Enterprise Oversight. The Realtor's group forecasts new home prices to rise 0.8 percent this year.

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

Last Updated: June 19, 2006 15:40 EDT