Builders broke ground in September on fewer houses than anticipated, and building permits dropped, signaling that the market will slow once government incentives have elapsed.

Housing starts rose 0.5%, to an annual rate of 590,000, from a 587,000 pace in August that was lower than previously estimated, the Commerce Department reported Tuesday. Permits, a sign of future construction, fell for the second time in the past three months.

Builders may be paring back in anticipation of the Nov. 30 expiration of the government's $8,000 tax credit for first-time homebuyers.

"It's still way too early to say that housing markets are generating ongoing momentum, and builders right now are justifiably cautious," said Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh. "There's a great deal of concern out there about hangover effects from the recession on new-home sales."

Economists had forecast that starts would grow to a 610,000 rate, from the initially reported 598,000 in August, according to the median of 76 estimates in a Bloomberg News survey.

The estimates ranged from 582,000 to 630,000.

Building permits fell 1.2%, to a 573,000 annual rate, in September. They had been expected to climb to a 595,000 pace, from 579,000 in August.

Construction of single-family homes, which accounts for about 85% of the industry, grew by 3.9%, to a 501,000 rate. Work on multifamily units, which makes up the rest of the market and is often volatile, slumped 15%, to an 89,000 rate.

The entire gain in starts was attributed to a 7.1 % increase in the South. The other three regions fell, led by an 8.8 % decrease in the West.

New-home sales have risen in seven out of eight months since reaching a four-decade low pace of 329,000 in January. The Commerce Department is scheduled to release September's sales report on Oct. 28.

Builders are becoming more concerned that sales will shrink once the tax credit for first-time homebuyers expires. The National Association of Home Builders/Wells Fargo confidence index, released Monday, unexpectedly declined for October.

Realtors and home builders are urging Congress to extend the incentive, and Treasury Secretary Timothy Geithner said last month that the Obama administration plans to take a "careful look" at the proposal.

D.R. Horton Inc., the largest U.S. home builder by revenue, is among companies projecting the recent improvement in some parts of the country will be sustained.

The Fort Worth company said last month that it is buying finished lots rather than building on undeveloped land it already owns, in an effort to augment its construction pipeline in anticipation of a housing revival.

"There have been some small, encouraging signs in our sales and our average sales prices," Bill W. Wheat, D.R. Horton's chief financial officer, said on a Sept. 30 call with investors, but areas such as Las Vegas and Phoenix were still struggling.

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