Housing starts decreased 5.5% to a 1.28 million annualized rate last month, according to government data released Thursday. The figure was below all but one estimate in a Bloomberg survey of economists. 

Building permits, which point to future construction, fell 3.8% to a 1.39 million annual rate, also the weakest since June 2020. The declines in starts and permits were broad across multifamily and single-family units. Authorized permits for single-family homes dropped for a fourth straight month to the slowest pace in a year.

The drop in homebuilding suggests residential construction may detract from economic growth after stabilizing earlier this year. Before the report, the Federal Reserve Bank of Atlanta's GDPNow forecast had pegged the category to barely contribute to gross domestic product in the current quarter.

"The weakest US housing starts since the pandemic-led shutdowns are fairly convincing evidence of restrictive monetary policy," Sal Guatieri, senior economist at BMO Capital Markets, said in a note. "While a growing population and workforce are providing some support, US home builders won't become busier until borrowing costs fall."

Recent data indicating cooling inflation as well as consumer spending should give the Fed greater confidence to start cutting interest rates, which will lower mortgage rates, too. Even so, the US still faces a huge housing shortage, which is keeping prices elevated and locking many Americans out of homeownership.

Major homebuilders including Lennar Corp. and KB Home have been trying to offset high rates with generous sales incentives, which has helped boost demand. Even so, the companies have been able to maintain healthy margins, which executives say can go up further when a lower-rate environment allows them to reduce concessions.

Construction declined in three regions, led by a 19% slump in the Midwest. While building activity picked up in the West, the pace is still slower than what was seen for much of last year. 

Home completions fell as well. The number of multifamily projects already under construction dropped to the lowest since September 2022, while those of one-family units were the weakest this year.

The housing starts data are volatile, and the government report showed 90% confidence that the monthly change ranged from a 3.9% decline to a 14.9% gain.

Separate data out Thursday showed that initial applications for US unemployment benefits dropped slightly last week from a 10-month high in the prior period. Continuing claims, a proxy for the number of people receiving unemployment benefits, rose for a seventh straight week.

--With assistance from Chris Middleton.