Rising Mortgage Rates Stunt New Housing Starts : Construction: Government reports a steeper-than-expected 10% drop in U.S. home building.

Rising mortgage rates sapped the home building industry in June as construction starts on new homes and apartments dropped nearly 10% nationwide and nearly 9% in the West, the Commerce Department said Wednesday.

The falloff was much steeper than expected and follows a report Tuesday from the National Assn. of Home Builders that said fewer prospective homeowners were touring new projects and builders were increasingly pessimistic about sales.

Building activity in the western region--which is dominated by California--fell 8.8% to an annual rate of 320,000 units.

In California, rising mortgage rates and falling consumer confidence has led Kaufman & Broad--the state’s largest home builder--to lower the number of homes it plans to build during the current fiscal year, to about 6,400 from 7,500, spokesman Greg Romano said.

However, Kaufman, which built only 5,745 homes last year, as well as other builders and lenders remain optimistic about the state’s housing market.

“It’s still going to be a great year,” Romano said.

Residential construction lending in June in California is expected to jump about 30% from last year’s level, to $918 million--the highest amount since December, 1991, according to John Karevoll, who publishes financial and real estate information for Dataquick Information Systems in La Jolla.

Thomas Leahy, who heads residential construction lending operations at Bank of America, said he expects building loans in California to remain strong this year and in 1995.

“With a slow but steady strengthening in the California economy, we see more and more buyers coming back into the marketplace,” Leahy said.

The Federal Reserve Board has pushed up short-term interest rates four times this year, driving up long-term rates that affect mortgages. The housing industry is especially sensitive to changes in interest rates, and mortgage rates have climbed sharply since touching bottom last fall.

The Federal Home Loan Mortgage Corp., or Freddie Mac, said the 30-year mortgage loan rate last week had risen to 8.72%--about 30% above the low of 6.74% reached in October last year.

That adds nearly $300 a month to a payment on a typical $100,000 mortgage, enough to wipe out some potential buyers’ ability to qualify for a loan.

“The run-up in rates has throttled housing,” said Warren Lasko, executive vice president of the Mortgage Bankers Assn.

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In June, the annual rate of starts on new homes slumped 9.8% to a seasonally adjusted annual rate of 1.35 million units, after a revised increase of 1.8% in May and a 3.2% fall in April.

Most of the fall in June building occurred in multiple-unit apartments, which plummeted 35.7% from May to a seasonally adjusted annual rate of 193,000 units. Construction of single-family homes was down 3.3% to a rate of 1.16 million--the third straight monthly fall.

Even so, starts were 9% higher than in June, 1993, when they were running at a rate of 1.25 million. But Lasko of the Mortgage Bankers Assn. said housing has peaked for the year.

“The Fed has certainly done its job,” Lasko said.

Building activity in June was weaker in every region of the country except the Northeast, where construction picked up modestly. In addition, applications for permits fell for a second straight month, suggesting that construction starts may lose more momentum in coming months.

Regionally in June, Northeast starts increased 4.5% to an annual rate of 139,000 units.

By contrast, starts dropped steeply in the South, by 13.2% to a rate of 597,000 units. In the Midwest, starts were down 9.2% to a 295,000-unit rate.

The National Assn. of Home Builders said only 31% of its members reported good sales in July, down from 36% in June. They said buyer traffic was deteriorating at project sites so there was little incentive to keep building.