Housing starts were weaker than expected in August, dropping 6.2% to an annualized 895,000 units following a downward revision to July levels to 954,000 units (originally reported as 965,000). There was an even bigger drop in permits by 8.9% to an annualized 854,000, which does not augur well for any imminent rebound in new construction. The weakness in starts was largely concentrated in the multiples component, which dropped 15.1%. This implies that some of the weakness may be a reflection of changes to the New York City building code that went into effect July 1 and that advanced construction activity into June at the expense of subsequent months. Starts of single-family units dropped a much more moderate 1.9%. A continuing impact from the building code changes was evident in the regional data as starts in the Northeast dropped 14.5%. However, this factor does not explain all of the month's weakness -declines were also evident in the Midwest (-13.6%) and the South (-7.4%). Starts activity in the South rose 10.8%. The average level of starts so far in the third quarter of 924,500 units is down from 1,025,000 in the second quarter. This suggests that new construction will likely continue to exert downward pressure on residential investment in the third quarter where another double-digit decline is likely following the 15.8% drop in the second quarter. Although there are some tentative signs in previously released data that housing sales for both existing and new homes are starting to stabilize, inventories of unsold units remain at historically high levels. This implies that there will be continuing downward pressure on new construction. The "ongoing housing contraction" was one of the factors mentioned by the Fed yesterday following the conclusion of the FOMC meeting that are likely to continue "to weigh on economic growth over the next few quarters."