U.S. builders broke ground for fewer homes in March, and permits fell to a record low, as home builders sought to rein in inventory amid rising foreclosures.

Housing starts fell 10.8%, to an annual rate of 510,000, the Commerce Department said Thursday.

Building permits, an indicator of future construction, fell 9%, to 513,000.

A glut of unsold properties is pulling down home prices nationwide, prompting builders to scale back projects.

"Buyers seem to be more interested in picking up bargain-basement prices in the existing-home market than in the new-home market," said Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh. "Builders are justifiably cautious now, with many indicators showing adverse conditions."

Starts were projected to fall to a 540,000 annual pace, from the 583,000 estimated the previous month, according to the median of forecasts by 72 economists Bloomberg News surveyed. Their estimates ranged from 500,000 to 608,000.

The survey's median estimate for permits forecast a drop to a 549,000 annual rate.

Construction of single-family homes was unchanged, at a 358,000 rate, the report said.

Work on multifamily homes, such as townhouses and apartment buildings, fell 29%, to an annual rate of 152,000, after surging in February.

The decline in starts was led by a 26% drop in the West and 17% in the South. Starts rose in the Midwest and Northeast.

Home starts have plunged from a peak rate of 2.27 million in January 2006, which capped the biggest housing boom in six decades.

In a sign the housing slump may be nearing a bottom, the National Association of Home Builders/Wells Fargo confidence index rose this month to its highest level since October, the trade group said Wednesday. Confidence rose to 14 from 9 as record-low mortgage rates and falling prices started to stir demand.

Readings below 50 mean respondents see conditions as poor.

In addition, sales of both new and existing homes rose in February from record lows.

However, property values may fall further as foreclosures put even more homes back on the market. With job losses mounting, foreclosure filings rose 24% in the first quarter from a year earlier, RealtyTrac Inc., a seller of default data, said Thursday.

Home prices in 20 U.S. cities tracked by the S&P/Case-Shiller index have dropped 29% since their peak in July 2006.

Southern California house and condominium sales grew 52% in March from a year earlier as buyers took advantage of prices 35% lower than in March 2008, MDA DataQuick, a San Diego research company, said Wednesday.

Last month Lennar Corp., the fourth-largest home builder, reported falling orders and a wider loss than a year earlier in its fiscal first quarter, which ended Feb. 28.

"Low consumer confidence, increased unemployment and growing foreclosure rates negatively impacted new-home sales in most of our markets," Lennar chief executive Stuart Miller said on March 30. "We continue to adjust."

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