Home construction at lowest point in 6 months

NEW YORK (CNNMoney.com) -- Home builders initiated construction of far fewer new homes in October than the month before, a big and unexpected drop for the struggling industry, according to a government report issued Wednesday.

Homebuilders began construction at an annual rate of 529,000 new homes during the month, 10.6% below the revised September rate of 592,000 and 30.7% below the 763,000 rate during October 2008. It was the lowest level of housing starts since April, when the annual rate was 479,000.

A panel of industry observers compiled by Briefing.com had forecast housing starts of 600,000 during the month. It was the second month in a row of dashed housing start expectations.

"The numbers stink," said real estate analyst Mike Larson of Weiss Research. "They're negative across the board."

That weakness included the number of building permits issued in October, which fell to seasonally adjusted annual rate of 552,000. That was 4% below the revised September rate of 575,000 and 24.3% below the October 2008 estimate of 729,000.

The slowdown in construction means that there are many fewer new homes for sale, about 251,000 in all. That's the smallest inventory since 1982, according to Larson.

"The new home market, which was dramatically oversupplied during the boom, is now dramatically undersupplied," he said.

Part of the reason for the lack of building activity is high foreclosure rates. Those discourage builders, according to Larson. Many of the foreclosures compete directly with new homes for buyers.

"That's one reason why builders are not being aggressive," he said. "There are a lot of nearly new homes that banks are holding and trying to sell. That keeps the new home market relatively weak."

Since the tax credit was reinstated, October may represent a deep valley in new home start stats. By then, the credit had ceased to be of value to builders, according to David Crowe, the chief economist for the National Association of Homebuilders.

"By October, there was no way to start a home and have time to finish it and sell it before the credit ended," he said.

Crowe expects to see starts to begin increasing again with the tax credit extension. "November figures should reflect some renewed builder confidence," he said.

New home construction forms a big part of the nation's economy. When people buy new homes, they also purchase many products to fill them.

Fewer new homes being built may be a bad sign that the impact of the government's economic stimulus package may be limited.