Yet another ignominious stat for the housing sector in the world's largest economy.

U.S. housing starts plunged 16.8% [pdf] in January, the U.S. Commerce Department announced Wednesday, as builders continued to reduce supply amid the nation's worst housing slump in decades.

Housing starts for new homes fell to a 466,000 annual rate in January -- the weakest level since World War II. Housing starts are now down 56% in the past year and about 80% since the sector's peak achieved about three years ago.

Economists surveyed by Bloomberg News had expected housing starts to total a 530,000 annualized rate in January. Housing starts for December were revised lower to 547,000.

Further, single family home starts fell 8% to a 335,000 annual rate -- a record low. And building permits declined 4.8% in January to a 521,000 annual rate.

Trying to see the bright side

Economist Peter Dawson said Wednesday the only positive one can cite from the January housing starts stat is the fact that "with builders cutting back, at some point inventories are going to start to decline, setting the stage for a housing sector recovery."

"Builders continue to do what you'd expect them to do, which is cut back dramatically in the face of a weak economy and less-than-ideal conditions for borrowers," Dawson said. "At some quarter in the future, as foreclosures trend lower, the excess housing supply will have vanished and it will make sense to start building homes again. Until then, housing will remain low and will continue to be a drag on U.S. GDP."

In the days ahead, the Obama administration is expected to announce a major program to reduce home foreclosures.

Many economists and analysts expect new home starts to continue to decline through at least Q2 2009, and probably longer, as home builders reduce construction, for the aforementioned reasons.

Some analysts also say the housing sector regionally may incur a corrective period as long as two to three years -- lasting through perhaps mid-2010 -- as markets such as California and Florida compensate for large speculative overbuilding during the 2003-2007 housing boom.

Economic Analysis: For investors, the housing sector is bad news for the U.S. stock market. Low or tepid housing starts generally suggests weak demand conditions are likely to prevail in lateral sectors (such as appliances, furniture, etc.), which historically has weighed on the stock market.

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