Housing Starts Declined 5.6%
In October; Permits Also Slid

New residential construction fell in October, a sign that builders are showing restraint amid high inventories of unsold homes and rising mortgage rates.

The Commerce Department said housing starts decreased 5.6% to a seasonally adjusted 2.014 million annual rate -- the largest decline since a 17.7% drop in March. September starts, originally seen at 2.108 million, were revised upward to 2.134 million. Building permits, an indicator of future construction activity, fell 6.7% to a 2.071 million annual rate in the steepest drop since a 7.2% fall in September 1999.

Builders appear to be dialing back new construction amid growing inventories and signs of slowing demand. The estimate of new houses for sale at the end of September climbed to 493,000, a supply of 4.9 months at the current sales pace, according to an earlier report from the Commerce Department. The stockpile had gone up 3.1% from August and was 20% higher than a year ago. Meanwhile, new-home sales in September were 0.1% below last year's level.

"The supply of new homes for sale, relative to the pace of sales, has been rising for well over a year, and builders are now reacting by slowing the pace of new construction," Ian Shepherdson of High Frequency Economics wrote in a research note.

The low borrowing costs which have drawn many buyers into the market are moving upward. The average rate on a 30-year fixed mortgage rate was 6.07% in October, the highest of any month this year, according to Freddie Mac. With rates climbing, the Mortgage Bankers Association said Wednesday that mortgage application volume fell 0.6% last week.

Meanwhile, builders' costs are rising. Labor Department data on producer prices released this week showed costs of materials and components for construction rose 1.4% last month, after climbing 1.1% in September.

Any moderation in groundbreakings could be gradual. Evidence exists of a big backlog in construction, in the form of a low construction starts-to-unstarted permits ratio. Plus, new homes will be built along the hurricane-battered Gulf Coast in a rebuilding process that could stretch over several years.

Regionally, home construction last month decreased 0.5% to 998,000 in the South, 10.5% to 333,000 in the Midwest, 7.5% to 172,000 in the Northeast and 10.8% to 511,000 in the West. Single-family housing starts fell 3.7%, while starts of housing with two or more units fell 14.8%. Construction of homes with five or more units decreased 11.7% to 271,000 units. Nationwide, an estimated 177,400 houses were actually started, and an estimated 169,700 building permits were issued, based on unadjusted figures.

Industrial Production Rebounds

U.S. industrial production rebounded in October, posting its biggest increase in more than a year as many industries ramped up activity following recent hurricanes, the Federal Reserve said Thursday. Industrial production surged 0.9% last month, its biggest increase since May 2004, after plunging 1.5% in September. Capacity utilization rose 0.6 percentage point in October to a level of 79.5% from a revised 78.9% in September, previously reported at 79.0%.

"Hurricane-related recoveries in many industries and the resolution of a strike at a major aircraft producer contributed significantly to the increase in output," the Fed said.

Economists had expected industrial output in October to revive as the Gulf Coast region continues to recover from recent hurricanes. The resolution in late September of a nearly monthlong strike of machinists at Boeing Co. also was expected to boost industrial production in October.

Manufacturing output rose 1.4%, the biggest increase in six years, after falling 0.7% in September. Mining output fell 0.5% after plunging 8.6% in September and utilities output fell 1.9% after falling 0.9% in September, the Fed said. Manufacturing capacity use rose to 79.0%, its highest level in five years, from 78.1% in September.

Separately, the number of U.S. workers filing initial applications for unemployment benefits fell to its lowest level in more than six months, the Labor Department said Thursday. Initial jobless claims fell 25,000 to a seasonally adjusted level of 303,000 in the week ended Nov. 12, the lowest level since mid-April. The four-week moving average of initial jobless claims fell 13,500 to 321,500.

Email your comments to rjeditor@dowjones.com.