NEW YORK (CNN/Money) - The pace of new home construction slowed in the United States in January, the government said Wednesday, as the red-hot housing market cooled from December's 20-year-high pace.

But many economists noted that bad weather may have played a role in the decline and said the housing market is likely to stay relatively strong as long as interest rates stay low.

Homebuilding cools off U.S. housing starts, seasonally adjusted annual rate, in millions Date Units  Jun 2003  1.844  Jul 2003  1.890  Aug 2003  1.831  Sep 2003  1.931  Oct 2003  1.977  Nov 2003  2.054  Dec 2003  2.067  Jan 2004  1.903   Source:  Commerce Department

The Commerce Department said housing starts sank 7.9 percent to a seasonally adjusted annual rate of 1.9 million units, after rising a revised 0.6 percent in December. Economists, on average, had expected housing starts to dip to a 2 million-unit pace, according to Briefing.com.

January's pace was the slowest since last September, while December's was the fastest since February 1984.

"There was a sharp decline in housing starts in January, but let's not panic just yet," said Joel Naroff, president of Naroff Economic Advisors. "Cold and snowy weather can take its toll on construction, and that may have been the case in January."

Starts slowed more sharply in the Northeast and Midwest -- hit by unusually bitter cold last month -- than in the South and West, a hint that weather did play a role.

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And building permits, a forward-looking indicator of housing demand, fell by a less precipitous 2.8 percent to an annual rate of 1.9 million units after rising 4.8 percent in December. The reading was about in line with economists' forecasts, on average.

"The implication is that raw winter weather may have depressed starts last month, particularly late in the month," UBS chief economist Maury Harris said in a research note. "Even so, starts remained above the 2003 average [of] 1.85 million [units]."

On Wall Street, stocks showed little reaction to the report, trading lower, while Treasury bond prices rose.

The housing market has been one of the strongest sectors of the economy in recent years, fueled by the lowest mortgage rates in a generation, helping to make consumers wealthier and keep them spending.

Rates began to rise in the second half of 2003, leading many analysts to expect housing to cool off in 2004. Sales of new and preowned homes did, in fact, slow at the end of the year.

But interest rates have stayed stubbornly low, keeping housing demand relatively high, and a jump in rates isn't likely until the Federal Reserve starts pushing up its key short-term interest rate. But the Fed, the nation's central bank, is probably on hold until employers start hiring in significant numbers.

"A serious downturn in housing activity will have to wait until there is a meaningful increase in mortgage rates," said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. "For that, we have to wait until payrolls take off and the Fed signals tighter policy."

Housing has been so strong, in fact, that some observers have worried there is a housing-market bubble, akin to the stock market bubble of the late 1990s. The fear is that home prices are artificially high and in danger of tumbling, which would hurt homeowners.

But most economists dismiss this worry.

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Even as they acknowledge that some local markets may be in overinflated, the analysts also say housing supply seems appropriate -- unlike the late 1980s and early 1990s, when builders slapped together houses in a speculative frenzy. The result: a glut of inventory and tumbling prices.

But Bank One chief economist Diane Swonk warned that, historically, homebuilders are often caught at the end of housing booms with way too much supply, putting downward pressure on prices.

"By the end of the year, there will be some builders with some overhang of construction relative to demand," Swonk said. "Now's the time when you'd hope everybody cools off a bit and moderates their building, but that's not human nature -- and it's not the way for homebuilders to make money in the near term."

Homebuilders themselves are slightly less optimistic about the housing market's prospects for the next six months, according to a survey released Tuesday by the National Association of Home Builders.

NAHB economist Michael Carliner agreed with Swonk that, in the past, homebuilders have been caught with too much supply. But he said there were reasons to hope this cycle would be different.

"Builders, like most businesses, have been keeping inventories under better control -- either because they're more careful or because lenders are more careful, or because builders haven't been able to keep up with demand," he said.

"I think they're less likely to overbuild than they were in the '70s or '80s, but that's a concern they need to keep in mind."