Builders respond to increasing inventories by cutting construction starts.

Builders slow down starts of new homes.

Construction starts on new homes plunged last month as builders curtailed production in response to mounting inventory and slowing sales.

The Commerce Department reported yesterday that housing starts dropped 6% in August from a month earlier to a seasonally adjusted annual rate of 1.665 million units. That was the fifth decline in construction starts in the past six months and the slowest rate of starts since April 2003. When compared with a year earlier, construction starts were down 19.8%.

Construction starts on single-family homes fell 5.9% in August from a month earlier and declined 20.6% from a year earlier, the government report showed. Housing starts for multifamily homes with five or more units fell 8.2% in August from the previous month and declined 16.9% from a year earlier.

The Commerce Department report also showed that building permits — a barometer of future construction activity — fell 2.3% to a seasonally adjusted annual rate of 1.722 million in August when compared with the month before and were down 21.9% in August from a year earlier.

It is "pretty darn clear that … we’re in a pretty substantial downswing here," said David Seiders, chief economist of the National Association of Home Builders. Developers "can’t keep bringing new supply on the market until [home] inventories come down and affordability is restored. The downside risk of [housing] to the real economy should be getting a lot of attention."

Yesterday’s report on construction starts and building permits comes on the heels of a pessimistic reading on the home-builder association’s confidence index, which was released Monday. The index indicated that home builders feel pessimistic about housing-market conditions and are likely to cut construction activity further for the rest of the year. The association reported Monday that its sentiment index for U.S. sales of new, single-family homes fell in September to 30 from 33 in August, indicating that most builders think the housing market is in poor shape. The housing index, compiled by the NAHB and Wells Fargo, was at 65 a year ago. A reading of 50 would indicate builder sentiment was balanced between good and poor.

Phillip Neuhart, an economic analyst with Wachovia Corp. in Charlotte, N.C., said the pullback in housing-construction activity will likely trim economic growth in the second half by at least 0.5 percentage point. The NAHB’s Mr. Seiders said the slowing housing market could shave second-half economic growth by as much as a full percentage point. The 56 economists surveyed in WSJ.com’s September survey said they expect economic growth averaging roughly 2.7% during the second half.