Residential building permits and housing starts continued to fall in July with the latter measure of the nation's economic health dropping more than at any time since January 1997.

The monthly report on new residential construction issued by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development showed permits for privately-owned building permits for residential construction being issued at a seasonally adjusted annual rate of 1,373,000, a drop of 2.8 percent below the revised June rate of 1,413,000 and 22.6 percent below the revised estimate of 1,774,000 units in July one year ago.

Single family permits fared slightly better; 1,003,000 permits were issued in July, 1.6 percent less than the June figure of 1,019,000.

Housing starts for the month were at an annualized rate of 1,381,000, a drop of 6.1 percent from the June estimate of 1,470,000 and nearly 21 percent off of the July, 2006 pace. Single family housing starts were down 7.3 percent from June.

Builders were holding around 194,000 permits on which construction had not yet begun in July compared to 206,900 in June. A staggering 103,800 of those permits were in the Southern states as were nearly 50 percent of the 117,500 unused permits for single family construction.

Not surprisingly, builder confidence is also eroding. The latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) took another hit in August, reaching its lowest level in over16 years.

The HMI asks builders to respond to three measures of confidence each month; how they measure current single-family home sales and what they expect from those sales over the next six months - both on a scale of "good," "fair," or "poor," and whether current traffic of prospective buyers is "high to very high," "average," or "low to very low." Each measure is ranked separately and then used to calculate a seasonally adjusted index. Any number over 50 for the components or the main index indicates that more builders view sales conditions as positive rather than negative.

Following a slide that has gone on for months, the HMI declined another two points in August to 22, the lowest level the 20 year survey has seen since January, 1991. The index gauging current single-family home sales fell a single point, to 23, while the index gauging sales expectations for the next six months declined two points to 32 and that gauging traffic of prospective buyers declined three points to 16.

National Association of Home Builders (NAHB) President Brian Catalde said, "Builders realize that issues related to mortgage credit cost and availability have become more acute, filtering some prospective buyers out of the market and prompting others to delay their decision to purchase a new home. Builders are responding by trimming prices and stepping up non-price incentives to bolster sales and limit cancellations, although we're dealing in a difficult market environment."

NAHB Chief Economist David Seiders cited the subprime mortgage situation as being a part of the problem but said, "... the government-related parts of the mortgage market still are functioning well and the underlying economic fundamentals promise to remain solid for some time - providing support to the longer-run housing outlook. We now expect to see home sales return to an upward path by early next year and we expect housing starts to begin a gradual recovery process by mid-2008. From there, the market will have plenty of room to grow in 2009 and beyond."