Finance news. My opinion.

Builders probably broke ground on fewer homes in May, signaling the residential real-estate market remains the biggest risk to growth, economists said ahead of reports this week.

Housing starts fell to a 980,000 pace last month, from 1.032 million in April, according to the median forecast in a Bloomberg News survey. Building permits, a signal of future construction, fell to a 960,000 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. Declines in construction will limit any rebound in economic growth, even as tax rebates give consumers a temporary boost.

“The first signals of stabilization are going to come from new-homes sales, which we haven't seen yet,'' said Julia Coronado, a senior economist at Barclays Capital in New York. Housing “will be on a downward trend.''

The Commerce Department's construction report is due June 17. Housing starts dropped to a 17-year low 954,000 annual pace in March.

Banks repossessed twice as many homes in May and foreclosure filings rose 48 percent from a year ago as falling house prices trapped borrowers in mortgages they couldn't afford, RealtyTrac Inc. said last week.

One in every 483 U.S. households either lost a home to foreclosure, received a default notice or was warned of a pending auction, RealtyTrac said.

Builder Losses

The five largest homebuilders have reported a combined $3.4 billion in losses in their most recent quarters as new-home sales fell. Stricter lending standards and rising foreclosures are reducing demand for homes.

A report tomorrow from the National Association of Home Builders/Wells Fargo is forecast to show builder optimism held at the second-lowest level on record this month.

The slump in construction will be one factor restraining economic growth in coming months, a report from the Conference Board may show on June 19. The New York research group's index of leading economic indicators was unchanged in May, according to the median estimate free credit report .com. The gauge points to the direction of the economy over the next three to six months.

Another concern is the spiraling cost of raw materials. Wholesale prices jumped 1 percent last month, pushed up by energy and food costs, a Labor Department report on June 17 may show, according to the Bloomberg survey.

So-called core producer prices, which exclude food and fuel, increased 0.2 percent after a 0.4 percent April gain.

Fuel Costs

The Labor Department's report on consumer prices last week showed a jump in fuel costs also contributed to a 0.6 percent increase in the cost of living in May. The core rate rose just 0.2 percent, indicating companies haven't been able to completely pass the increase in expenses along to customers.

“The energy shock not only boosts headline inflation, but also erodes consumer purchasing power and squeezes profit margins,'' said Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York.

Federal Reserve Chairman Ben S. Bernanke last week said policy makers are paying “close attention'' to rising commodity costs and will “strongly resist'' any surge in inflation expectations.

At the same time, the risk the economy has entered a substantial downturn “appears to have diminished over the past month or so,'' Bernanke said.

Fed policy makers are scheduled to next vote on the direction of the benchmark overnight lending rate between banks at the conclusion of their June 24-25 meeting.

Rising costs and slowing demand have taken a toll on manufacturing. A report from the Fed on June 17 may show industrial production increased 0.1 percent in May, after a 0.7 percent drop the prior month. Improving sales overseas are helping to prevent a deeper factory slump.

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