New homes were started at a seasonally adjusted annual rate of 529,000 units, the Census Bureau said Wednesday. That's 31% below the pace a year ago. Analysts had forecast an annual rate of 600,000.

Starts of single-family homes fell 6.8% from September, to a 476,000 annual pace. Multifamily building plunged 34% to a rate of 53,000.

"I take it as a warning sign," says Joel Naroff of Naroff Economic Advisors.

The report comes amid a general upturn in the residential real estate market, with both housing starts and home sales trending up in recent months.

Some economists downplayed its significance, noting builders likely scaled back because of uncertainty about whether Congress would extend an $8,000 tax credit for first-time home buyers. This month, the credit was extended, and a $6,500 credit was made available to many existing homeowners.

"We expect both starts and permits to rebound, probably quite strongly" the next few months, says Ian Shepherdson of High Frequency Economics.

But Wells Fargo's Mark Vitner doesn't think the extension "is going to provide the same kind of boost," because most interested buyers already used the credit. "There doesn't seem to be any improvement in underlying (new home) demand."

The specter of inflation is also prompting modest worries. Consumer prices rose 0.3% in October from the previous month, in line with expectations, the Labor Department said. But core prices, which exclude volatile food and energy prices, climbed 0.2%, slightly more than estimates.

Economist Brian Bethune of IHS Global Insight dismissed the increase, noting much of it resulted from a 1.7% jump in prices of new and used vehicles. That, he says, can be pinned on the cash-for-clunkers program, which depleted stocks of 2009 vehicles, ushering in pricier 2010 models sooner than planned. It also caused nearly 700,000 used cars to be scrapped, shrinking supplies.

Housing costs were unchanged. Apparel prices fell 0.4%. But airline fares jumped 1.7%, and medical costs rose 0.2% after a 0.4% increase in September.

Bethune says the report gives the Federal Reserve "a checkered flag" to keep interest rates low. Yet Vitner says core inflation was greater than expected with unemployment at 10.2%. Inflation could "bottom out sooner than in the last two recessions."

Enlarge By Jim R. Bounds, Bloomberg News The pace of new home construction was 31% lower in October compared with a year ago.