BUILDERS in the United States broke ground in May on the fewest houses in 17 years.

This signals declines in construction still represent the biggest risk to the economy, Bloomberg News reported.

Housing starts fell 3.3 percent to a 975,000 pace from a revised 1.008 million in April, the Commerce Department said on Tuesday in Washington. The reading was below economists' forecasts and the lowest since March 1991. Building permits, a sign of future construction, fell 1.3 percent to a 969,000 rate.

Rising foreclosures, higher mortgage rates and declining property values threaten to keep home sales depressed in coming months, discouraging builders from starting new projects. 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.

"The downtrend is still in place," said Joshua Shapiro, chief US economist at Maria Fiorini Ramirez Inc in New York. "Inventories are still very high, prices are still coming down. None of that argues for a turnaround yet."

A separate report showed US producer prices climbed more than forecast as fuel and food costs jumped. The producer-price index rose 1.4 percent in May from April, the biggest increase since November. The Labor Department's figures also showed that prices rose 0.2 percent excluding food and energy.

Treasuries rose after the figures, while the greenback was little changed. Benchmark 10-year note yields dropped to 4.21 percent at 9:11am on Tuesday in New York, from 4.27 percent late on Monday. The dollar traded at US$1.5492, from US$1.5477.

Economists forecast the pace of starts would decline to 980,000, from a previously reported 1.032 million for April, according to the median projection of 72 economists surveyed by Bloomberg News. Estimates ranged from 875,000 to 1.06 million.

Building permits were forecast to fall to 960,000 from 982,000. Starts were down 32 percent compared with May 2007.

Work on single-family homes decreased 1 percent to a 674,000 pace, also the fewest since 1991, Commerce said. Construction of multifamily homes, such as townhouses and apartment buildings, dropped 8 percent to an annual rate of 301,000 in May.

Starts decreased in three of four regions, led by a 25-percent drop in the Midwest. Construction fell 10 percent in the West and 4.4 percent in the South. Starts increased 62 percent in the Northeast.

Residential construction has subtracted from economic growth every quarter since the first three months of 2006, culminating in a 25.5-percent drop in the first quarter that was the largest since 1981.

Builders' confidence matched a record low in June. The National Association of Home Builders/Wells Fargo sentiment index fell to 18 from 19 in May, the group said on Tuesday. While gauges of present and future sales held at May's pace, the measure of buyer traffic dropped.

As property values have fallen, some home owners have become trapped in unaffordable mortgages. Banks repossessed twice as many homes in May and foreclosure filings rose 48 percent from a year ago, RealtyTrac Inc said last week.