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By Greg Robb, MarketWatch

RISMEDIA, Oct. 19, 2007-(MarketWatch)-Construction on new homes plunged in September to the lowest level in 14 years, clear evidence that the turmoil roiling financial markets has sent the nation’s housing sector into a tailspin.

Housing starts fell 10.2% to a seasonally adjusted annual rate of 1.19 million, the lowest level since 1.32 million in March 1993, the Commerce Department reported Wednesday.

The decline was larger than expected.

Meanwhile, building permits dropped 7.3% in September, clocking in at a seasonally adjusted annual rate of 1.23 million. This was the lowest seen since July 1993 and less than the 1.28 million pace expected by economists surveyed by MarketWatch.

Economists were clearly shaken by the accelerating weakness in housing starts.

“There is no end in sight to the drop,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

He noted that housing starts fell 66% from 1978 to 1981. “This episode will likely be worse. The housing hit is intensifying,” Shepherdson said.

Housing starts are down 30.8% in the past year, while permits have fallen 25.9%.

The construction decline was more noteworthy in apartment buildings, starts for which fell 34.3% to a 228,000 annual rate.

Single-family permits fell 1.7% to 963,000, the lowest since March 1993. Single-family starts are down 30.8% in the past year.

The housing market has been battered by a glut of homes on the market. Making the situation worse, foreclosures have jumped, pushing even more houses on the market, and many would-be borrowers are finding it more difficult and more expensive to get a mortgage due to the recent tumult in financial markets.

Convergence of negative factors

In the past weeks, the credit crunch has worsened, with reports of even the most qualified borrowers being denied credit.

Federal Reserve Chief Ben Bernanke said on Monday that the deteriorating outlook for housing was a key factor in the central bank’s decision nearly a month ago to cut interest rates by a surprisingly big half a percentage point. The sector remains a key downside risk to U.S. economic growth as the weakness may curtail consumer spending or cause businesses to grow cautious and scale back hiring.

Meanwhile, U.S. home builders have grown even more pessimistic, keying off the triple whammy of tight credit, abundant supply and falling prices.

The seasonally adjusted housing market index fell to a record low of 18 in October from 20 in September, the National Association of Home Builders reported on Tuesday. It’s the lowest reading in the index since its inception in 1985.

In addition, a new forecast from the Mortgage Bankers Association said it expects originations to fall 18% in 2008 and another 6% in 2009 before the market shows signs of recovering.

The government cautions that its housing data are volatile and subject to large sampling and other statistical errors.

Almost all analysts agree that housing won’t recover until the overhang of unsold homes is worked off. For that to happen, builders must slow the pace of new construction.

In September, housing starts fell in three of four regions, with the Northeast showing a 45.4% rebound. Starts dropped by 11.7% in the South, by 10.1% in the West and by 28.4% in the Midwest.

On a similar note, housing completions fell 8.2% in September to a 1.391 million annual rate, the lowest in nine years.

In a separate report Wednesday, the Labor Department said inflation heated up in September on higher food and energy prices.

Greg Robb is a senior reporter for MarketWatch in Washington

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