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U.S. housing starts unexpectedly surged the most in more than two years in June because of a change in New York City's building code that overshadowed a slide in single-family home construction.

Housing starts rose 9.1 percent to a 1.066 million pace from a revised 977,000 rate in May, the Commerce Department said today in Washington. Excluding a jump in construction of multifamily units in the Northeast, starts would have dropped 4 percent. Work began on single-family homes at the slowest pace in 17 years.

Rising foreclosures, higher mortgage rates and declining property values threaten to keep home sales depressed in coming months, discouraging builders from starting new projects during the worst housing slump in 25 years. Spending on residential projects may continue to be a drag on growth the rest of this year as builders try to work off excess inventories.

“It's still a very, very weak housing market around the country,'' said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. “Builders are coping with sharp oversupply, a big overhang of single-family homes that for the most part are still falling in prices.''

A separate government report showed initial claims for unemployment benefits rose less than forecast last week. Claims increased to 366,000 from 348,000 the prior week, the Labor Department said.

Economists' Forecasts

Economists forecast the pace of starts would decline to 960,000, from a previously reported 975,000 for May, according to the median on 76 projections in a Bloomberg News survey. Estimates ranged from 925,000 to 1.03 million.

A new construction code that took effect in New York City on July 1 prompted builders to start construction on, and seek permits for, condos and apartments a month earlier, Commerce said.

Building permits rose 11.6 percent to a 1.091 million rate in June. Excluding the Northeast, permits would have risen 0.7 percent.

Work on single-family homes decreased 5.3 percent to a 647,000 pace, the weakest since January 1991, Commerce said. Construction of multifamily homes, such as townhouses and apartment buildings, jumped 43 percent to an annual rate of 419,000 in June, led by the Northeast.

Starts dropped in two of four regions, led by an 11 percent drop in the Midwest.

Economic Impact

Declines in construction probably will limit economic growth, even as tax rebates boost consumer spending. Residential building dropped at a 24.6 percent pace in the first quarter and subtracted 1.1 percentage points from growth.

Federal Reserve Chairman Ben S. Bernanke this week abandoned his June assessment that the threat of an economic downturn had diminished. During testimony before U.S. lawmakers in Washington he also said that “upside risks to the inflation outlook have intensified.''

After stabilizing over the last nine months, builders' confidence slumped again in July. The National Association of Home Builders/Wells Fargo sentiment index dropped to 16, the lowest level since records began in 1985, from 18 in June, the group said yesterday.

As property values have fallen, some homeowners are stuck with mortgages they can't afford, and that is leading to an increase in foreclosures. Bank seizures increased a record 171 percent from a year ago and foreclosure filings rose 53 percent in June, RealtyTrac Inc., a seller of default data, said last week in a statement.

Foreclosures Rise

The Irvine, California-based company began collecting statistics on default notices, warnings of scheduled auction and repossessions in January 2005. One in every 500 U.S. households entered a stage of the foreclosure process, RealtyTrac said.

Concern over the ability of Fannie Mae and Freddie Mac, the largest U.S. purchasers of mortgages, to withstand the subprime lending meltdown has also heightened the credit crisis and may further limit access to loans.

M/I Homes inc., a homebuilder concentrating in the Midwest, Florida and the Mid-Atlantic states, said July 10 it delivered 478 homes in the second quarter, down from 755 in the same period in 2007. The Columbus, Ohio-based company said the number of new contracts fell to 530, from 688.

The slump in housing has caused job losses in construction as well as in manufacturing. Payrolls at builders declined by 43,000 in June after a drop of 37,000 the prior month, the Labor Department said this month. The total loss of construction jobs since September 2006 has swelled to 528,000.

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