Builders broke ground on the fewest new homes in at least half a century, as a deepening economic contraction raised the risk of deflation.
Housing starts fell 18.9 percent to an annual rate of 625,000, according to the separate report from the Commerce Department.
Worsening residential construction means the economy will likely shrink 6 percent or more this quarter, the most since the early 1980s, some analysts said. The figures helped cement the case for the Federal Reserve as it lowered its key interest-rate target to a record low yesterday, signaling willingness to use all "available tools" to restore growth and avert a depression.
"Just as housing continues to fall faster and farther than most thought possible, we wonder if that might be true with the broader economy as well," said Carl Riccadonna, a senior U.S. economist at Deutsche Bank Securities, which downgraded its fourth-quarter gross domestic product forecast to a drop of as much as 8 percent after the housing report. Risks of deflation "are increasing on the horizon."
Democratic lawmakers are seeking a new effort to address the housing crisis, which last year triggered the collapse in credit markets that has caused almost $1 trillion of write-downs and losses at financial firms. President-elect Barack Obama has committed to stem mortgage foreclosures and enact a two-year fiscal stimulus that will save or generate 2.5 million jobs and jump-start growth.
Fed policymakers, noting "inflationary pressures have diminished appreciably," lowered their benchmark target rate to a range of between zero and 0.25 percent, from 1 percent. They pledged to "employ all available tools to promote the resumption of sustainable economic growth," including purchases of securities to support the mortgage and housing markets.
American consumers are scaling back purchases as the value of homes declines, hurting the market for new construction.
Housing starts declined in all regions of the country, led by a drop of 34.6 percent in the Northeast. Construction of single-family homes dropped 16.9 per cent to a record-low 441,000 rate. Work on multifamily homes, such as townhouses and apartment buildings, fell 23.3 percent, to an annual rate of 184,000.
Building permits, an indicator of future residential projects, declined 15.6 percent to a 616,000 pace, also the lowest on record.
With reporting from Scott Lanman in Washington and Heather Burke and Betty Liu in New York.