Stati Uniti, la mia casa farà crash

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AP
Pending Home Sales Near a 6-Year Low
Tuesday July 3, 11:39 am ET
By Christopher S. Rugaber, AP Business Writer
U.S. Pending Home Sales Index Drops 3.5 Percent in May to a Near 6-Year Low


WASHINGTON (AP) -- Pending sales of existing homes dropped to their lowest level in almost six years, a real estate trade group said Tuesday, demonstrating the persistence of the housing slump.
The 3.5 percent decline in May, compared with the previous month, follows a drop of 3.4 percent in April and a 4.5 percent dip in March. It leaves the National Association of Realtors' index at its lowest point since September 2001.


Lawrence Yun, the association's senior economist, said turmoil in the mortgage market is weighing on home sales, as lenders pull back from riskier mortgages to borrowers with weak credit histories.

"Some transactions are being postponed from mortgage market disruptions," Yun said. While mortgage applications are increasing, some of that is a result of buyers seeking alternatives to subprime financing, he said.

The association's index of pending home sales fell to 97.7 in May, from a downwardly revised figure of 101.2 in April. The May figure is 13.3 percent lower than the May 2006 reading of 112.7.

The index stood at 89.8 in September 2001. An index reading of 100 is equal to the average level of contract activity in 2001.

The realtors association index is based on a national sample representing about 20 percent of existing home sales. It is considered an indicator of how sales will perform in the coming weeks because it measures home purchases in which a sales contract has been signed, but the deal has not yet been closed.

Pending home sales rose in the West and Northeast, the association said, but fell in the South and Midwest.

The drop in pending sales follows a report from the association last week that showed actual sales of existing homes also fell in May, to the lowest level in four years, while the median home price dropped for a record 10th consecutive month.

Sales of existing single-family homes and condominiums dropped by 0.3 percent to 5.99 million units in May, the slowest sales pace since June of 2003, the trade group reported June 25. The median price of a home sold last month dropped to $223,700, down 2.1 percent from a year ago.

Sales of new homes have also continued to lag, dragging down the stocks of homebuilders such as KB Home, Toll Brothers Inc. and Pulte Homes Inc.

Shares of all three companies, as well as others in the sector, fell Monday after they were downgraded by a Citigroup analyst.

Last Thursday, KB Home reported a 36 percent drop in revenue and a loss of $148.7 million, or $1.93 per share, for its second quarter ended May 31. The company took a pretax charge of $308.2 million to reflect the decreased value of unsold homes on its books and for walking away from deposits on land it no longer wants to buy.

Shares of KB fell 45 cents to $38.62 in morning trading, while shares of Toll Brothers rose 35 cents to $25.12 and shares of Pulte Homes dropped 6 cents to $22.55.

 

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Analysts Say Mortgage Woes May Worsen
Wednesday July 25, 7:25 pm ET
By Alex Veiga, AP Business Writer
Lenders' Prime Mortgage Woes Are a Sign of Even Bigger Problems to Come, Analysts Say


LOS ANGELES (AP) -- Here's a scary thought about the latest bad news on housing: A surprising increase in late loan payments and defaults among home owners with good credit is so far coming from traditional woes, like divorces, job losses and unexpected medical bills.


The next and biggest wave of problem loans could come as monthly payments soar for both prime and subprime borrowers who took out adjustable-rate loans with little or no documentation, or who used so-called piggyback loans on top of their first mortgages to make up for small down payments, analysts said.

These exotic loans were the only way many borrowers -- even those with good incomes and sterling credit histories -- could afford to get into the housing market as home prices soared in the last decade. But now those decisions are looking suspect.

That was one of the messages that sent a jolt through the mortgage industry and the stock market on Tuesday after Countrywide Financial Corp. reported its second-quarter profit shrank by nearly a third as softening home prices led to rising delinquencies and mortgage defaults.

Countrywide, whose shares have lost 11.7 percent of their value in the last two days, laid part of the blame for the uptick in delinquencies on borrowers with good credit who had taken out prime home equity loans.

Analysts said the trend could continue, particularly in areas of the country that have been hardest hit by job losses in general or seen a decline in speculation-driven construction, such as South Florida, parts of California and Las Vegas.

"As housing values weaken broadly and the job market slows in these areas that we're focused on, all borrowers will be touched," said Mark Zandi, chief economist at Moody's Economy.com.

He said subprime borrowers, those with spotty credit records, will likely show the greatest number of defaults. "But even prime, fixed-rate first mortgage borrowers will experience more credit problems," Zandi said.

The problems are expected even though the U.S. unemployment rate is currently at 4.5 percent, still low by historical standards.

More signs of the housing slowdown surfaced Wednesday as the National Association of Realtors reported that sales of existing homes fell by 3.8 percent in June to the slowest pace in more than four years.

In reporting its earnings, Calabasas-based Countrywide, the top U.S. mortgage lender, said it was forced to take impairment charges as it braced for the possibility of more people failing to make their mortgage payments on time.

The company said borrowers becoming unemployed or divorcing were the leading reasons why many borrowers with prime loans were falling behind on payments. And company officials told analysts on a conference call that the uptick in missed payments was not due primarily to borrowers seeing their loans' interest rate reset, triggering higher monthly payments.

Still, the mortgage industry anticipates that it could face a rash of defaults in coming months as many adjustable mortgages originated in 2005 and 2006 during the height of the housing market frenzy begin to reset to higher interest rates.

The loans, initially attractive options for buyers because of their cheaper "teaser" interest rates, can adjust higher after as little as two years. Even a small percentage increase can translate into a payment shock.

"The losses are just beginning," said Christopher Brendler, an analyst with Stifel Nicolaus & Co. Inc.

"Housing is increasingly a problem, prices are likely to go down, and so these loans underwritten in the best of times will now season in the worst of times," he said.

The mortgage industry has already tightened lending standards in response to the jump in defaults by subprime borrowers.

With fewer first-time buyers entering the market, homeowners in the mid-tier of the market, who tend to be among the most creditworthy, prime borrowers, are having a tougher time selling their homes.

"The same problems you saw in the subprime sector that caused the big meltdown in March is now a broader industry problem that's hitting the prime sector," Brendler said

 

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Foreclosure rates could soar
Moody's Economy.com forecasts that defaults won't peak until 2008 due to ARM resets and falling home prices.
By Les Christie, CNNMoney.com staff writer
July 26 2007: 5:21 PM EDT


NEW YORK (CNNMoney.com) -- The already poor performance of many mortgage loans will worsen substantially through the rest of the year, according to an analysis released Thursday by Moody's Economy.com.

The company predicts that 2.5 million first mortgages will default this year, with little chance for improvement soon - Economy.com expects delinquencies to peak in the summer of 2008 at 3.6 percent of all outstanding mortgage debt, up from 2.9 percent during the first three months of 2007.



The worst-hit loan category will be subprime adjustable-rate mortgages (ARMs). Economy.com expects foreclosures for those loans to hit 10 percent of that group by mid-2008. The foreclosure rate for that group is currently 4 percent and was as low as 2.5 percent in 2005.

"The economic fallout from the devolving mortgage market will be substantial, but conditions would be even worse if not for a continued generally sturdy job market," said Mark Zandi, chief economist of Moody's Economy.com.

Subprime ARMs issued during the last three months of 2006 could fare worst of all, with a projected foreclosure rate of just under 20 percent during the fall of 2011.

That would mean a full one in five owners still paying off subprime ARMs from late 2006 - about 12,000 in all - would lose their homes. Many others from that group would have already lost their homes to foreclosure in the previous years. (Foreclosures: Most ruthless states)

One-time, high-flying markets will suffer the most. California's Central Valley is particularly vulnerable, according to the study. Other hard-pressed areas cluster in Florida, Nevada, New York, Arizona and the District of Columbia.

The delinquency increase will be sparked by two main factors: Falling home prices and rising interest rates on adjustable mortgages. (Another drop in new home sales.)

"As [interest] rates reset, it will make it more difficult for borrowers," said Zandi. They'll face higher monthly mortgage payments even as other housing expenses - taxes, energy, insurance - are also growing.

Falling home prices - Zandi forecasts a 7 percent drop nationwide for the year -mean that less home equity is available for homeowners to tap to pay bills.

The impact of housing woes will be felt throughout the economy, according to Zandi - he has shaved a quarter point off his projected economic growth because of housing related issues.

But some local markets will suffer far more. Nationwide, about one in 10 jobs is housing related. On the west coast of Florida, however, the most housing industry dependant area in the nation, one of every five jobs is housing related.

As for the national picture, Zandi evaluated several risks to the accuracy of his housing market outlook. Some of them could have positive impacts on markets, such as if the Fed lowered interest rates.

Another positive would be if lenders, mortgage servicers and investors in mortgage backed securities were able to increase their loan modification efforts. These are concessions made to mortgage borrowers that would alter the terms of their loans, even lower payments, and enable them to keep their homes.

Negative risks would include some kind of shock to the global economy. "Until quite recently," said Zandi, "investors have been nonchalant about risk; they are still quite tolerant of it."

A shock, such another major hedge fund meltdown, as two Bear Stearns funds recently experienced, could cause a "crisis of confidence," according to Zandi and usher in a period of "investor freeze" leading to lower liquidity. "And credit," he said, "is the lifeblood of the economy." Foreclosures: Hardest hit zip codes.

 

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High-Risk Mortgages Become Toxic Mess
Saturday August 11, 12:15 am ET
By Michael Liedtke, AP Business Writer
AP Centerpiece: High-Risk Mortgages Turning Into Toxic Mess for Lenders, Borrowers


SAN FRANCISCO (AP) -- When Linda Martin refinanced the mortgages on three different houses nearly three years ago, she thought the lower monthly payments would help her save more money for retirement.



Instead, the Lakewood, Colo. skin-care specialist is sinking in financial quicksand amid a widening mortgage morass that's pulling down home prices and threatening to drag the U.S. economy into a recession.

"I'm hanging on by a thread, not knowing whether I am going to be living in a car in six months," said Martin, who declined to reveal her age.

Martin is among the hundreds of thousands of borrowers saddled with "option" adjustable rate mortgages, risky loans that dangled bargain-basement introductory payments and also let borrowers defer a portion of interest payments until later years.

Millions of other borrowers are wrestling with another type of adjustable rate mortgage, or ARM, called "interest-only." These loans allowed borrowers to pay just enough each month to cover the interest owed on the loan, leaving the balance of the outstanding debt unchanged.

While most of the mortgage market worries so far have focused on the huge losses flowing from the subprime home loans made to people with bad credit, the option and interest-only ARMs held by more creditworthy borrowers loom as another calamity in the making.

If the worst fears about these loans materialize, the economic damage would likely extend well beyond the United States because much of the debt has been packaged into securities sold to pension funds, banks and other investors around the world who were hungry for high yields. The fallout could also further depress housing prices, leaving U.S. consumers feeling poorer and less likely to buy the merchandise imported from overseas.

So far, less than 4 percent of the option and interest-only ARMs are delinquent, well below the 14 percent rate for the subprime market, where about $1.5 trillion in home loans are still outstanding, according to the most recent data from the research firm First American LoanPerformance.

But there is still reason to be alarmed because the trouble with option and interest-only ARMs still appears to be in its early stages. Many industry observers suspect the biggest problems will emerge during the next 16 months as shoddily underwritten ARMs made near the real estate market's peak in 2005 and 2006 climb to higher interest rates.

"Those loans are begging to blow up. This is a true financial crisis," said Christopher Thornberg, a principal with Beacon Economics, a consulting firm that has followed real estate market's ups and downs.

Lenders made an estimated $581 billion in option ARM loans during 2005 and 2006 while doling out nearly $1.4 trillion in interest-only ARMs, according to LoanPerformance. A recent study estimated about $325 billion of these loans will default, leading to more than 1 million homeowners relinquishing their property to lenders. By comparison, about $212 billion in subprime loans were delinquent through May.

The initially low monthly payments on these exotic ARMs enabled more people to buy homes and enticed other borrowers to refinance their existing mortgages to free up cash for other purposes.

Now, the exotic ARMs are tormenting overextended homeowners, reckless lenders and shortsighted investors as the teaser rates rise, dramatically driving up monthly loan payments against a backdrop of declining property values.

The conditions have deteriorated so much that Angelo Mozilo, chief executive of mortgage lender Countrywide Financial Corp., recently described the current real estate slump as the worst since the Depression ended nearly 70 years ago.

Countrywide sent out another distress signal late Thursday in a regulatory filing that warned it's being forced to hold on to more loans than it wants to keep. "We believe the current environment of rapidly changing and evolving credit markets may provide increasing challenges for the financial services sector, including Countrywide," the Calabasas-based company said.

Washington Mutual Inc., another major lender of option and interest-only ARMs, echoed those concerns in a similarly bleak Securities and Exchange Commission filing that warned the subprime problems are cropping up in higher-quality mortgages, too.

Option ARMs like Martin's are especially toxic when home prices start to shrivel.

Here's why: When borrowers pay the minimum monthly amount on an option-ARM, they aren't covering the amount of interest accruing on the loan. To compensate, lenders add the amount of unpaid interest to the mortgage's outstanding debt.

Option-ARMs also allow for a higher monthly payment to reduce the loan's principal, but most borrowers only make the minimum installment. At some lenders, 80 to 90 percent of the option-ARM borrowers are paying the minimum amount.

So, a homeowner who originally borrowed $250,000 under an option-ARM could end up owing an additional $5,000 to $10,000 after making the minimum monthly payment for a year, depending on the terms.

The negative amortization isn't as troubling when home prices are rising because the borrower could still be building more equity than debt.

But now that real estate prices are sliding, the additional debt created by option-ARMs raises the chances that the property will be worth less than the remaining amount owed on the loan -- a perilous position known as being "upside down." The situation only becomes more worrisome as the teaser rates on the loans adjust upward.

It's a scary scenario because many borrowers obtained their loans with little or no down payment, meaning they only had a small amount of equity to start. Nearly 18 percent of the first mortgages originated last year went to borrowers with no equity in the property, up from 5 percent in 2002, according to an analysis by First American CoreLogic, a research firm affiliated with LoanPerformance.

Other borrowers eroded their equity with second loans known as "piggyback" mortgages or lines of credit secured by their properties.

That means many ARM borrowers unable to afford their higher loan payments after their loans reset probably won't be able to extricate themselves by selling their homes. And refinancing into a more manageable mortgage is becoming increasingly difficult as suddenly leery lenders stop accepting application in an effort to avoid further headaches.

"It's a perfect storm that is going to lead to more foreclosures with severe downward pressure on home values," said George McCarthy, a housing economist with the Ford Foundation.

Martin doesn't think she is upside down on her loans yet, but knows she is getting uncomfortably close as home prices around her neighborhood continue to sag.

When Martin refinanced the mortgages on her home and two rental properties in October 2004, she said she owed a total of $735,000. The combined debt now stands at $777,000 and is growing by more than $2,000 each month.

Martin says she would have never refinanced if a mortgage broker hadn't misled her about how the new loans worked -- a frequent complaint among borrowers with option-ARMs.

As she contacts lawmakers and attorneys in search of help, Martin isn't focused on retirement any more. She is more worried about making sure she won't lose her home.

"I very well may be looking at a foreclosure case," she said. "I may just have to walk away from these loans."

Martin's situation isn't unique.

Although they have been around since 1981, option-ARMs weren't common until the past few years. They previously had been aimed at high-paid workers who depended on large commissions and bonuses.

But option-ARMs began making their way into the mainstream in 2004 as commission-hungry brokers and profit-driven lenders tried to capitalize on intense home-buying demand driven by soaring real estate prices.

Last year, negative amortization loans accounted for 9.9 percent, or $350 billion, of all mortgages nationwide, up from just 0.4 percent as recently as 2003, according to LoanPerformance.

The mortgages were particularly popular in high-priced real estate markets like California or areas like Nevada, Arizona and Florida, where speculators were buying homes as investments instead of places to live.

Option-ARMs accounted for nearly 22 percent of the mortgages made in California during 2006, according to LoanPerformance. Other hot spots included: Nevada (15 percent), Hawaii (13.3 percent), Florida (12.2 percent), Washington (10.9 percent) and Arizona (10.6 percent).

If many of those loans go bad, major option-ARM lenders will likely be forced to erase some of the profits that they have already booked from the exotic mortgages. Under an accrual accounting method allowed by regulators, option-ARM lenders routinely record the uncollected interest as income even though the money may never be paid.

This phantom income has swelled along with the use of option-ARMs. For instance, Washington Mutual recognized $706 million in uncollected interest from negative amortization loans during the first half of this year, a 61 percent increase from the same time last year.

Investors already appear to be seeking shelter from the possible financial storm ahead.

Washington Mutual's stock price has dropped by 21 percent so far this year while Countrywide's shares have shed 34 percent. Another major option-ARM lender, IndyMac Bancorp Inc., has been even harder hit, with its stock plunging by 55 percent since the end of last year. The sharp downturn in those three stocks alone have wiped out a combined $24 billion in shareholder wealth.

Thornberg is among the economists who believes the mortgage market turmoil could lead to a recession during the next year. "This snowball is just 20 percent down the hill. It's nowhere near the bottom," he said.

The biggest risks appear concentrated among ARMs that began with an initial interest rate of 4 percent or less. CoreLogic estimates 1.4 million ARMs totaling $521 billion fell into this danger zone from 2004 through 2006. That represented nearly 10 percent of the $5.38 trillion in home loans originated during that period.

Christopher Cagan, CoreLogic's director of research and analytics, predicts about 1.1 million ARMs totaling $325 billion will sink into foreclosure as rising monthly payments squeeze borrowers. After accounting for the money recovered through property sales, he expects the losses from the fallout to total $112 billion, with the damage spread out over six years.

Although significant, the losses won't be large enough to topple the United States' $12 trillion economy, Cagan said. "This is the turning of a business cycle," he said. "There will be some pain, but most people will be fine and most lenders will be fine."

That's little consolation to homeowners like Andrew Villaruz, a 43-year-old hospital administrator who said he refinanced into an option-ARM late last year without understanding what he was getting into. His loan balance quickly grew from $364,000 to $370,000, a shift that become even more disturbing to him as he watched more foreclosure signs go up around his Sacramento neighborhood.

Coupled with other costs lumped into the loan, Villaruz figures he lost about $25,000 by the time he found another lender willing to refinance him into a more conventional mortgage. He sheepishly acknowledged he had never heard of a negative amortization loan until he had one. He knows enough now to stay away from them.

"They might be good for people who make a lot of money, but they don't pan out for the average person," he said. "They just don't make sense."

 

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Home Construction Down in July
Thursday August 16, 8:53 am ET
By Martin Crutsinger, AP Economics Writer
Home Construction Falls in July to the Slowest Pace in More Than a Decade


WASHINGTON (AP) -- Construction of new homes fell to the lowest level in more than a decade in July as builders continued to struggle with the steepest housing slump since 1991.
The Commerce Department reported Thursday that construction of new homes and apartments dropped 6.1 percent last month to a seasonally adjusted annual rate of 1.38 million units. That was down 20.9 percent from the pace of activity a year ago and represented the slowest pace since January 1997.


The housing industry, which had enjoyed a prolonged boom until 2006, has been struggling this year with a deepening slump as builders are slashing prices and throwing in various incentives in an effort to unload record levels of unsold homes. The problems have been worsened by rising home foreclosures, especially in the subprime market, a development which is dumping even more homes onto the glutted market.

In other economic news, the Labor Department reported that the number of newly laid off workers filing for unemployment benefits rose by 6,000 last week to 322,000. The increase was unexpected. Analysts had been looking for a decline of around 1,000.

The July drop in housing construction followed a 2.1 percent rise in June, which had been driven by a big increase in apartment building.

Applications for building permits, considered a good barometer of future activity, fell by 2.8 percent in July to an annual rate of 1.373 million units.

Housing construction fell in all parts of the country except the Midwest which posted a 2.6 percent increase in July. Construction starts were down 11 percent in the South, 3.7 percent in the West and 1.3 percent in the Northeast.

The current housing slump is the worst since a downturn that occurred during an economic recession in 1990-91.

Overall economic growth has slowed but so far there has been no recession as other sectors have offset the weakness in housing. However, private economists say that the threat of a recession would rise if consumer and business confidence were seriously eroded by the current troubles in financial markets.

Investor confidence has been rocked over the past two weeks by spreading troubles in credit markets amid concens about how many big hedge funds and banks will report serious credit problems.

Treasury Secretary Henry Paulson said in an interview published Thursday that the sharp downturn in financial markets "will extract a penalty on the growth rate" but he said he believed the economy and the markets were strong enough to absorb the losses without pushing the country into a recession.

"Looking over periods of stress that I've seen, this is the strongest global economy we've had," said Paulson, a 32-year veteran of Wall Street who headed investment giant Goldman Sachs before joining Bush's Cabinet last year. Paulson's comments came in an interview published in the Wall Street Journal.

The drop in housing construction followed news from the National Association of Realtors that sales of existing home fell in 41 states in the April-June quarter while one-third of metropolitan areas surveyed experienced price declines.

The National Association of Home Builders reported Wednesday that its barometer of builder confidence dipped by 2 points to 22 in early August, the lowest reading since January 1991, when the country was going through another severe housing downturn.

"Builders realize that issues related to mortgage credit cost and availability have become more acute, filtering some prospective buyers out of the market and prompting others to delay their decision to purchase a home," said Brian Catalde, a home builder from El Segundo, Calif., and the president of the home builders group.

 

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Home Prices Fall in August for 8th Month
Tuesday October 30, 11:04 am ET
By Vinnee Tong, AP Business Writer
US Home Prices Fell in August for the Eighth Month in a Row, No Turnaround in Sight


NEW YORK (AP) -- U.S. home prices fell nationwide in August for the eighth consecutive month, offering little hope of a turnaround anytime soon, according to the S&P/Case-Shiller index released Tuesday.

Things could get worse, said Yale economist Robert Shiller, who helped create the index.

"There is really no positive news in today's report," said Shiller, chief economist for MacroMarkets LLC, which collaborates with S&P on the indicator. "At both the national and metro area levels, the fall in home prices is showing no real signs of a slowdown or turnaround."

Home prices as measured by the index have fallen by more every month since the beginning of the year. August is the 21st month of decelerating returns.

An index of 10 U.S. metropolitan areas fell 5 percent in August from a year ago. That was the biggest drop since June 1991. The lowest ever was a decline of 6.3 percent in April 1991.

A broader index of 20 metropolitan areas fell 4.4 percent in August over last year, with 15 of 20 of them reporting that prices fell.

Housing prices have been a key worry for consumers, and the effect of the slowdown alongside the summer's steep decline in credit availability, has many worried that the economy will go into recession.

Many economists expect the Federal Reserve will cut rates again at the end of a two-day meeting starting Tuesday, after a bigger-than-expected half-point cut last month.

Notably, eight of the 20 metropolitan areas in the Case-Shiller index showed their lowest annual returns ever recorded in August. The report showed drops in Cleveland of 4.1 percent; Las Vegas, 7.6 percent; Miami, 7.8 percent; Minneapolis, 4 percent; Phoenix, 8 percent; San Diego, 8.3 percent; Tampa, Fla., 10.1 percent; and Washington, D.C., 7.2 percent.

Tampa surpassed Detroit as the worst performing city. Detroit had a 9.3 percent drop over last year.

The index is designed to track prices of typical single-family homes.

The National Association of Realtors said sales of existing homes fell 8 percent in September, the largest decline since 1999. The median price -- the point at which half the homes sold for more and half for less -- fell to $211,700 in September, down 4.2 percent from a year ago.

 

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Home Construction Plunged Last Year
Thursday January 17, 2:34 pm ET
By Martin Crutsinger, AP Economics Writer
Construction of New Homes Falls 24.8 Percent in 2007, the Largest Amount in 27 Years


WASHINGTON (AP) -- The prolonged slump in housing pushed construction of new homes in 2007 down by the largest amount in 27 years with the expectation that the downturn has further to go.
The Commerce Department reported Thursday that construction was started on 1.353 million new homes and apartments last year, down 24.8 percent from 2006. It was the second biggest annual decline on record, exceeded only by a 26 percent plunge in 1980, a period when the Federal Reserve was pushing interest rates to post-World War II records in an effort to combat an entrenched inflation problem.


Many economists believe that the current slump in housing will rival the dive in the late 1970s and early 1980s when housing construction fell for four straight years before beginning to recover after the severe 1981-82 recession. For December, construction fell by a bigger-than-expected 14.2 percent.

In other economic news, the Labor Department said the number of newly laid off workers filing applications for unemployment benefits dropped by 21,000 last week to 301,000. That marked the third consecutive weekly decline and occurred even though the government reported that the unemployment rate increased sharply in December.

Some economists believe the current housing troubles will push the country into another recession as consumers are staggered by the steep drop in housing -- which has pushed home values down in many parts of the country. Consumers also have been faced with rising mortgage defaults and a severe credit crunch which has made loans harder to obtain.

Various recent reports have increased those worries including news that unemployment in December shot up to 5 percent, rising by the largest amount in one months since the country was reeling from the 2001 terrorist attacks. Many large financial institutions have announced billions of dollars of losses due to the meltdown in subprime mortgages.

The drop in construction in December was bigger than economists had been expecting and reflected weakness in all parts of the country. Housing construction fell by 30.8 percent in the Midwest and was down 25.8 percent in the Northeast and 19.6 percent in the West. The decline in the South was a smaller 3.3 percent.

Economists said the weakness showed that the housing correction was getting worse since the turmoil in financial markets hit in August.

"Builders have finally thrown in the towel," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. "This is a precondition for recovery as it will eventually reduce the inventory overhang. But there is a long way to go."

For December, housing starts totaled 1.006 million units at an annual rate. In an ominous sign for the future, applications for building permits fell by 8.1 percent to an annual rate of 1.068 million units. That marked the seventh consecutive monthly decline and reflected the fact that builders have been slashing production plans in an effort to deal with a glut of unsold homes.

A survey of builder sentiment prepared by the National Association of Home Builders came in at the second-lowest level on record in January at a reading of 19. That was up slightly from the record low of 18 set in December. The index has been below 20 since October as builders struggle to deal with slumping demand, rising housing defaults and tighter lending standards.

Last week, KB Home, one of the nation's largest homebuilders, said losses in the fourth quarter had ballooned to more than $770 million.

Many economists believe the housing sector will remain weak through this year before starting to stage a rebound in 2009.