updated 10/23/2006 5:01:41 PM ET 2006-10-23T21:01:41

A slump in U.S. building permits to a five-year low in September may have been overlooked in the exuberance over unexpectedly robust housing starts reported on Wednesday but analysts say it’s a cause for concern.

After analyzing the Commerce Department’s report on housing starts and permits, some are expressing further worry about the weakening health of the housing sector.

“Has the housing market bottomed?” asked Phillip Neuhart, economic analyst at Wachovia Corp. in Charlotte, North Carolina. “We doubt it.”

To be sure, some analysts have said they believe the decline in the U.S. housing market is leveling off, and point to Tuesday’s home builders’ positive sentiment report, the first upbeat report in eight months.

At first glance, Wednesday’s housing data appeared to bear out that sanguine forecast, with housing starts showing an unexpected rise of 5.9 percent last month to an annual pace of 1.772 million units. With an overwhelming majority of economists expecting a drop, the news came as a big surprise.

But the strength seen in U.S. housing starts was seen by some to be outweighed by data for building permits for future groundbreaking, an indicator of builder confidence. September permits fell 6.3 percent to an annual pace of 1.619 million units, the lowest rate since October 2001, far below what economists had been forecasting.

Indeed, while rising month over month, September’s housing starts are still 17.9 percent lower than a year earlier. The slump in permits is even more pronounced, down 27.7 percent from September 2005.

“The continued weakness in demand for permits provides further evidence that the housing market has yet to bottom and will probably not do so for another six to nine months,” Wachovia’s Neuhart said in commentary published Wednesday.

The housing starts data measure the number of residential units on which construction begins each month and reflects the commitment of builders to new construction. It is registered at the start of construction of a new building intended primarily as residential; the start is defined as the beginning of excavation of the foundation.

The bounce in starts is being deemed as only temporary given the plunge in permits last month.

September’s drop in permits was the seventh straight decline and was the biggest month-over-month decline so far in this cycle in housing, according to Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

In commentary published Wednesday, Shepherdson said the drop on permits is accelerating.   

“It isn’t over,” he said. “It has barely begun.”

Permits tend to be a better indicator for housing since they are less volatile than starts and are typically not revised as often. The drop in permits suggests that September’s jump in starts will be turned around, according to Haseeb Ahmed, U.S. economist at JPMorgan in New York.

Ahmed, however, predicts stabilization down the road.

“There are, however, tentative signs that starts and permits will stabilize in the near term or at least the rates of decline will ease substantially,” he said in commentary published Wednesday.

Brian Fabbri, chief U.S. economist at BNP Paribas in New York, however, said other indicators of housing activity show the decline in starts still has further to go due to the gap between starts and permits.

A longer view of a much larger contraction in permits than in starts implies that there is a much deeper decline in starts expected, he said in research published Wednesday.

The company said September’s rise in starts was a sign builders are trying to complete as many projects as they can before prices and demand fall too much and the big increases in completions should also raise the number of unsold units.

“September should prove to be the last burst of activity for a while; it will certainly deepen the overhang of unsold new homes,” he said.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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