A slide in housing starts signals a tepid economy

The pace of U.S. home construction sank last month as a glut of unsold homes kept builders at bay, suggesting that economic growth would remain tepid and keeping hopes alive for interest-rate cuts.

The Commerce Department said Friday that housing starts dropped 14.6% in October to an annual pace of 11.49 million, the lowest level in more than six years.

At the same time, building permits, an indicator of construction plans, fell 6.3% to a 1.54-million unit pace, the weakest in nearly nine years.

The report, which showed starts off an eye-catching 27.4% from October of last year, was much weaker than economists on Wall Street had expected.

“The report introduces additional downside risk to residential investment and [economic] growth this quarter and in early 2007,” wrote Peter Kretzmer, an economist with Bank of America in New York.

The U.S. economy grew at a meager 1.6% annual rate in the third quarter in the face of a sharp downturn in the once-hot housing sector, as weaker demand and rising cancellations of new homes increased the inventory of unsold properties.

Many economists, however, had hoped the worst of the slump was over. But Friday’s data led some to have second thoughts.

“With demand having slowed sharply, supply is only catching up now and could remain very weak for some time,” said economist Alan Ruskin of RBS Greenwich Capital in Connecticut.

“Demand, however, is showing a few tentative signs of bottoming, but plainly there is considerable excess inventory that needs to be worked off and builders know it,” he added.

Economists said the data suggested the economy could prove weaker than Fed policy-makers had been expecting.

“I think there is a risk that the economy will underperform the Fed’s expectations. We have seen some signs of manufacturing weakness as well as housing emerging,” said David Sloan, an economist at 4Cast in New York.

Other data released this week had painted a somewhat healthier picture of the housing sector.

The National Assn. of Homebuilders/Wells Fargo housing market index released Thursday got a 2-point bump to 33 in November. The index had hit a 15-year low of 30 in September.

On Wednesday, the Mortgage Bankers Assn. reported that applications for U.S. home mortgages rose last week to their highest level since January as falling interest rates encouraged more loan refinancing. It also said residential mortgages were being refinanced at the fastest pace since October 2005.