Following a lower-than-expected level of housing starts and permits in the May report, plus a major downward revision in the month before, economists are expecting June's housing starts and permits figures from the Department of Commerce to continue declining.

Housing starts refer to the number of homes being built and provide a sense of how the housing sector has performed in the previous month.

In the May report, U.S. housing starts came in 5k below expectations at 975k, a month-over-month decline of 3.3%.



The consensus is for permits to fall to 960k in June, with economist forecasts ranging from a low of 925k to a high of 1030k.

"The number of unsold homes on the market today is at or near a record high. Reducing inventories will require that housing prices drop much further, and that builders refrain from putting up new homes," said Global Insight economists Brian Bethune and Nigel Gault in a research note. "Our view is that housing starts will drop more than 15% from current levels, before turning around late this year."

Bethune and Gault forecast housing starts will fall to 952k in June.

"Although housing starts are still falling, they are doing so at a slower rate than in recent months. This is why construction spending on single-family homes fell just 3.4% in May, the second-smallest drop in 10 months," they added. "Going forward, the declines will continue to shrink, and housing will become a progressively smaller drag on real GDP growth."

Meanwhile, building permits, an indicator of housing economy performance in upcoming months, fell to 969k in May from from April's 982k figure, a 1.3% month-over-month decrease. The consensus expects permits to fall to 965k in June, with economist forecasts ranging between 925k and 980k.

George Adell, fixed income strategist from Commerce Capital Markets, said markets will pay more attention to the housing data than to the Philly Fed Survey. Last month's housing starts hit a 26-year low, and bonds could rally if there is continued weakness in the housing market, he said. "I think if you get another weak reading, which is expected, it will be bond supportive. How far bonds will go is hard to say. If you look at traditional two-year yields they are usually 50-40 basis points above interest rates and that is exactly where we are today."

On Wednesday, the NAHB builder confidence survey reached a new record low, declining two points to 16.

By Patrick McGee and edited by Nancy Girgis