Economists say the rapid deterioration in U.S. housing starts in September means more bad news for the economy, especially as the survey didn't fully capture the impact from the financial turmoil late in the month, which suggests there will be further declines in the next report.

U.S. housing starts fell more than expected in September to 817k, representing a month-over-month decrease of 6.3%, according to data released from the U.S. Department of Commerce on Friday morning. The drop pushes the number of starts to its lowest level since 1991 and second lowest level on record.

Housing starts refer to the number of homes being built and provide a sense of how the housing sector has performed in the given month.

Single-family homes - the most important component in the report, accounting for four-fifths of housing starts - fell 12.0% to 544k, compared to the previous month's 618k. Single-family units have been falling for 16 of the past 17 months.

Patrick Newport, U.S. economist at Global Insight, said if the index falls another 20k, the number of starts will decline to levels not seen since the 1950s. Up to now, the lowest level in the 49-year index was 798k, which came during the 1991 recession.

Newport said the September index doesn't include the impact from the financial turmoil late in the month, which increases the chance of a substantial drop in October. In the longer term, he expects housing to bottom out "within the next six months," but said a recovery is predicated on a restoration in financial markets.

Sireen Hajj at Calyon said his expectation for a housing recovery is less optimistic.

"We do not expect to see a stabilization in housing until well into 2009," Hajj said. "ousing starts will remain weak in coming months, given the continued presence of an inventory overhang of new homes for sale, tighter mortgage lending standards and further home price declines."

According to Bankrate.com, the average rate for a 30-year fixed mortgage is 6.35% as of Friday, compared to 5.97% last week.

BMO's Benjamin Reitzes also said the future doesn't look promising for a quick recovery. "Housing will take another large bite out of real GDP growth in Q3 and, barring an unlikely bounce, Q4 will face a drag as well," he said. "While starts and permits are near all-time lows, we could see further declines as tightening credit conditions and a rapidly weakening economy keep the pressure on housing."

The previous month's reading for starts was revised down to 872k from a previously reported 895k. The consensus was looking for September to show a moderate decline to 872k.

Newport said he is "holding my breath about the government intervention," adding that it's "hard to say" if the policies implemented by Treasury Secretary Paulson and Fed Chairman Bernanke will be enough. Only one thing seems certain: "We're going to have a recession, and it's probably going to be a hard one," he said.

Building permits - which represent plans to construct new homes and therefore gauge housing performance in upcoming months - took an even steeper dive in September, falling 8.3% to 786k, down from 857k units in August. The consensus was looking for 840k permits.

Single-family permits fell 3.8% in the month, falling to 532k in September from August's 553k, while multiple-family unit permits plummeted 16.4% to 254k, down from 304k units in August.

That permits will continue falling was further reflected in the dismal results from the NAHB measure of builder confidence released on Thursday. According to that index, builder confidence tumbled to an all-time low in October.

On the market reaction, Hajj said the bond market response was muted, while the U.S. dollar weakened slightly against the euro.

By Patrick McGee and edited by Nancy Girgis
©CEP News Ltd. 2008