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By Jeff Bater From The Wall Street Journal Online

Home builders slowed groundbreakings during July, pulling construction to its lowest rate in 10 years as sales keep tumbling and credit tightens, a government report said Thursday.

Housing starts decreased by 6.1% to a seasonally adjusted 1.381 million annual rate, after rising 2.1% in June to 1.470 million, the Commerce Department said. Originally, Commerce reported June starts 2.3% higher at 1.467 million.

July starts were lower than Wall Street had predicted. The median forecast of 22 economists surveyed by Dow Jones Newswires was a 4.6% drop to a 1.400 million annual rate. It was the lowest level of starts since 1.355 million in January 1997.

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The housing sector is a mess. Year-to-year, housing starts were 20.9% below the level in July 2006. Falling demand for new homes and bloated inventories are discouraging builders. They are also worried about tight credit, a fear that has rattled financial markets in the past week and led central banks in parts of the world to rush in with injections of liquidity.

This week, the National Association of Home Builders said its August survey found members' confidence at the lowest since 1991.

"The decline in builder confidence is consistent with our outlook for further construction cuts and a prolonged housing recession," Lehman Brothers said in a note to clients Wednesday.

The Federal Reserve released a survey on Monday examining credit conditions in the U.S. Of the 16 domestic banks surveyed that originate subprime loans, 56% said they have tightened standards on those loans. Of those originating nontraditional mortgages including adjustable-rate and interest-only mortgages, 40% said they had tightened credit standards. The quarterly study of senior loan officers said demand for many types of commercial and consumer loans has weakened in the past three months. And 38% of survey respondents reporting weaker demand for prime mortgages; 44% of subprime issuers reported weaker demand.

The subprime crisis is behind an anxiety that some label a "credit crunch." Fears abound that more and more lenders will grow gun-shy. The phenomenon has been described as a financial contagion leading to a restriction on the availability of credit in world financial markets. The roots of the crisis are in the high-cost money that lenders doled to borrowers with bad credit who wanted to purchase homes. Rising interest rates and falling property values drove up defaults and foreclosures among these homeowners. That caused some lenders to shut down and cost investors billions of dollars in securities tied to subprime mortgage assets. Analysts see an unpleasant impact on the slumping housing market.

"Prospects for future sales remain grim given credit problems in the mortgage market," Lehman's note said. "Builders fear that tighter lending standards and the liquidity squeeze in the mortgage market will limit mortgage availability, further restraining sales."

Thursday's data contained a sign things will get even worse: building permits tumbled 2.8% to a 1.373 million annual rate in July. Economists had expected permits to drop 0.6% to a rate of 1.405 million. June permits fell 7.0% to 1.413 million. Permits, of course, are an indicator of future building activity.

July single-family housing starts decreased 7.3% to 1.070 million. Construction of housing with two or more units fell 1.6% to 311,000; within that category, groundbreakings of homes with five or more units -- or multi-family -- were 2.5% lower.

Regionally, housing starts decreased by 1.3% in the Northeast, 3.7% in the West, and 11.0% in the South. Construction rose in the Midwest, up 2.6%.

Nationwide, an estimated 127,800 houses were actually started in July, based on unseasonally adjusted figures. An estimated 118,600 building permits were issued last month, also based on unadjusted figures.

Jobless Claims Rise
The number of U.S. workers filing new claims for jobless benefits increased for a third-straight time last week to its highest level in two months, suggesting that labor markets continue to soften after tepid job gains in July.

Jobless claims were up 6,000 to 322,000 on a seasonally-adjusted basis in the week ended Aug. 11, the Labor Department said Thursday. Claims for the Aug. 4 week were unrevised.

Wall Street forecasts had called for 1,000 decline last week to 315,000, according to a Dow Jones Newswires survey.

The four-week average -- which economists use to gauge underlying labor market trends -- rose 4,750 last week to 312,500.

Labor markets are being eyed amid growing worries about the availability of credit in financial markets that have led to steep drops in global equity markets. As long as labor markets hold up, economic fundamentals should support growth. But if they start to falter, then consumers could curtail spending, which makes up the bulk of economic activity.

Nonfarm payrolls expanded by just 92,000 last month and the unemployment rate ticked up, though it remains low by historical standards. Thursday's claims figures suggest the underlying trend remains decent, though not as strong it was earlier in the year.

The Federal Reserve last week held interest rates steady at 5.25% for a ninth-straight time dating back to last summer and continued to cite inflation as its primary concern, though it acknowledged some downside growth risks. Officials again cited high resource utilization -- a nod to the tight jobs market -- as an inflation risk.

If labor markets and, in turn, consumption head lower it would likely intensify pressure on Fed officials to lower rates. Futures markets are already pricing in rate reductions as early as next month to alleviate credit crunch worries.

According to the Labor Department report Thursday, continuing claims for workers drawing unemployment benefits for more than a week rose 17,000 to 2,567,000 in the week ended Aug. 4, the latest week for which such data are available. That's the highest reading in four months.

The insured unemployment rate was unchanged at 1.9% in the Aug. 4 week.

There were 33 states and territories reporting an increase in initial jobless claims for the Aug. 4 week, while 20 reported a decrease.

Kentucky had the biggest increase, 4,731, due to layoffs in automobile and manufacturing industries. California reported the sharpest decline, 1,999, due to fewer layoffs in trade and services industries.

-- Brian Blackstone contributed to this article.
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