STORMY WEATHER: If the gloomy housing downturn persists, the peak of the stormy conditions could hit the US economy. -- PHOTO: BLOOMBERG NEWS

The cloudy US housing picture has become even grimmer, as housing starts sank 10.2 per cent last month to a 14-year low, government data revealed on Wednesday.

The report also showed the pace of new home construction at an annualised rate of 1.191 million units, the lowest since July 1993, and much weaker than the average forecast of 1.3 million.

The September report showed building permits, a sign of future construction activity, fell 7.3 per cent to a weaker- than-expected annual pace of 1.226 million.

The figures highlight the horrific slump in US real estate after a sizzling market turned suddenly cold last year. Economists say the slump is the main drag on US growth.

'The contraction in the housing sector is transitioning from an average downturn to among the worst in the post-World War II history of the US economy,' said Mr Michael Gregory, economist at BMO Capital Markets. 'As the current downturn probes deeper depths, the risk of outright recession will mount.'

Mr Brian Bethune, economist at Global Insight, said: 'The housing market is now navigating through 'perfect storm' conditions - a downward spiral involving reductions in demand, repetitive slashing of output, downward pressure on prices, tightening credit conditions and rising foreclosures.'

He saw the downturn persisting: 'It is likely that the peak of this storm will have an impact on the economy in the fourth quarter of 2007 and first quarter of 2008.'

Over the past 12 months, US housing starts were down 30.8 per cent and permits down 25.9 per cent.

The massive declines highlight the fact that builders have a big inventory of unsold homes that are keeping prices down.

But potential buyers are having a harder time getting mortgages, and companies have reported cancellation rates of 50 per cent or more on sales contracts.

Consumers are also beginning to ignore the builders' incentives and are waiting for even better deals as the housing crunch worsens.

Some analysts say the extended decline in housing will prompt the Federal Reserve to cut rates further after last month's half- point cut.

'The main concern that declining housing activity presents going forward is that the longer it persists, the greater the risk that it could spread to other areas of the economy such as consumer spending,' said Mr Paul Ferley, economist at RBC Financial Group.

AGENCE FRANCE-PRESSE