Housing starts plunge, a sign interest rates are beginning to have an impact.

WASHINGTON -- Housing starts fell twice as far as expected in October, the government reported yesterday, providing an important indication that higher interest rates are beginning to take a bigger bite out of the economy.

Builders started construction on 5.2% fewer houses and apartment buildings in October compared with September, the Commerce Department reported. The seasonally adjusted annualized rate fell to 1.419 million traits. Economists on average predicted the rate would fall by about 2.6%.

Starts of single-family houses plunged 7.4% to 1.137 million, more than offsetting a 4.8% gain in multifamily units, including apartment buildings. October's decline in total starts was the first since an 8.9% drop in June.

The report came two days after the Federal Reserve raised short-term interest rates for the sixth lime this year in an effort to slow growth and prevent higher inflation down the road.

The Fed's tightening of monetary policy has been driving up mortgage rates for much of the last year and may be starting to have an effect on housing construction, economists said.

Fixed-rate 30-year mortgages averaged 9.19% during the first week of November, compared with 8.93% in October, 8.64% in September, and 8.51% in August, according to Hugh Johnson, chief investment officer at First Albany Inc. October's average is up 236 basis points from a year ago, he noted.

The 236 basis points add about $160 to the monthly payment on a $100,000 mortgage.

Nonetheless, the housing market has yet to show any significant decline in the face of the higher rates. Starts have gown each quarter since the beginning of the year, and new single-family home sales were higher in the third quarter than in the second.

Economists yesterday said the October starts report at best probably signals the beginning of a very gradual down trend in housing, which by itself would not keep the Fed from raising rates again.

"I would say it's the beginning of a decline but I wouldn't use the term 'quick'; I would use the term 'mild,'" said Lyle Gramley, consulting economist with the Mortgage Bankers Association and a former Fed governor.

Yesterday's Commerce Department report also showed that building permits fell 1.7% in October. "That's more in line with what we're likely to see in the housing market in the coming months," Gramley said.

Permits are no better than starts as a leading indicator but they are less erratic, Gramley noted.

David Munro, chief U.S. economist of High Frequency Economics, agreed that there would probably be a modest downturn in housing. He noted that builder surveys in recent months have shown declining buyer traffic in homes for sale.

"October starts were down about 3% from the third-quarter average -- that's about what we can expect," Munro said. He predicted that starts and home sales on average will decline about 1% per month over the next two quarters.

Munro and other analysts predicted that the Fed may sit tight on rates at least until its first policy meeting of the new year in early February.

By then, Munro predicted, housing starts will have declined to monthly levels below 1.3 million-much more palatable to the Fed. That alone wouldn't stop the Fed from raising rates again, but it would help, he said.

Other analysts doubt that housing will turn downward this year. "Growth has slowed but I don't expect it to turn negative," said Johnson of First Albany. He predicted 1% to 2% growth in housing at least through the middle of next year. Fed officials, he noted, could live with that provided that other sectors of the economy start to cool off.

Banks and finance companies have been getting more creative in devising adjustable-rate mortgages with a very low first-year rate so that more home buyers can qualify, Johnson said.

Also yesterday, the Labor Department reported that initial unemployment insurance claims fell 5,000 to 327,000 in the week ended Nov. 12. The four-week moving average edged up to 326,250.

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