Housing starts dropped to their lowest level in a decade last month and permits for new construction declined as well, pointing to continued weakness in a sector of the economy that can drag down growth overall.

The Commerce Department reported{vbar}http://www.census.gov/indicator/www/newresconst.pdf today that the pace of homebuilding dropped more than 14 percent in January compared to the month before, to a seasonally adjusted annual rate of 1.4 million. That's the slowest annual rate since the late 1990s. Permits for new construction fell to a seasonally adjusted annual rate of 1,568,000 -- a drop of 3 percent over the prior month and more than 28 percent over the year before.

The government statistics follow release of a study by the National Association of Realtors{vbar}http://www.realtor.org/press_room/news_releases/2007/4thqtr_metro_prices_and_state_sales.html showing that home prices in about half of the country's cities fell in the last three months of 2006 compared to the year before -- the first time the group documented such a decline in the 28 years it has collected data.

The Washington area was among the losers: The average price of homes sold in the last three months of 2006 fell 2.6 percent, to $421,600, compared to the year before.

Collectively, the statistics undermine gains posted at the end of last year, when an increase in permits and housing starts and rising demand for homes led some to conclude that the housing slump was beginning to abate. With a large inventory of unsold homes on the market, however, the latest reports will likely renew concern that weakness in the housing market could cause broader problems.

While housing starts alone aren't necessarily a good predictor -- weather can drive the number up or down in deceptive ways -- a renewed decline in housing permit applications supported a "bearish" outlook for growth in upcoming months, said Ian Shepherdson, chief U.S. economist for the High Frequency Economics consulting firm.

The housing data are positive in one sense: They are likely to reinforce the view that the risk of inflation will remain moderate in coming months, a conclusion supported by another new report showing that the wholesale prices{vbar}http://www.bls.gov/news.release/pdf/ppi.pdf paid to producers fell in January. Lower energy prices and a decline in auto and truck prices led that 0.6 percent decrease.

But a deepening slump in housing could have broad implications for the economy. Rising home values have been an important component of economic growth in recent years, giving homeowners a sense of increased wealth and emboldening them to tap their home equity to pay for improvements and renovations, college tuition, or other major expenses.

Historically low interest rates provided an added incentive to spend.

With interest rates now higher and the real estate market stagnant, some analysts expect consumers to reverse course and clamp down.

However, David Lereah, the chief economist for the realtor's association, said he felt the group's recent study caught the housing market at its low point.

"This information confirms 2006 was the year of contraction, and hopefully the fourth quarter was the bottom of this current business cycle," Lereah said in a written release accompanying the report.