Builders broke ground on fewer U.S. residential construction projects in January as demand for single-family homes cooled from an almost seven-year high, signaling the rebound in housing remains uneven.

Housing starts declined 2 percent to a 1.07 million annual rate, following the prior month’s 1.09 million pace, a Commerce Department report showed Wednesday in Washington. The median forecast of 82 economists surveyed by Bloomberg was 1.07 million. Permits, a proxy for future construction, also fell.

Student debt, tight credit conditions and rising prices are probably preventing would-be first-time homebuyers from entering the market, which will damp construction. At the same time, a strengthening labor market and rising household formation may support building of rental units, underpinning residential real estate.

“We’re getting there, though gradually,” said Robert Stein, deputy chief economist at First Trust Portfolios LP in Wheaton, Illinois. “We see the housing recovery continuing this year. It’ll be choppy, but we’ll see consistent improvement over the previous year.”

Estimates in the Bloomberg survey of economists ranged from 997,000 to 1.11 million. The prior month’s reading was little changed from the previous estimate, while the November reading was revised down.

Producer Prices

Producer prices in the U.S. dropped 0.8 percent in January, the biggest decrease since records for the new series began in November 2009, a report from the Labor Department also showed on Wednesday. The decrease was led by a 10.3 percent plunge in energy that was also the biggest in the brief history of the figures.

Stock-index futures held earlier losses after the reports. The contract on the Standard & Poor’s 500 Index maturing in March fell 0.2 percent to 2,100.34 at 9:02 a.m. in New York.

Applications for building permits declined 0.7 percent in January to a 1.05 million pace, also reflecting a decline in applications for construction of single-family houses, the Commerce Department report showed. They were projected to advance to 1.07, according to a Bloomberg survey.

Construction of single-family homes dropped 6.7 percent to a 678,000 rate in January from 727,000 the previous month that was the strongest since March 2008, the Commerce Department said. Work on multi-family homes, such as townhouses and apartment buildings, climbed 7.5 percent to an annual rate of 387,000, the most since July.

Broad-Based Retreat

Three of four regions had a decrease in starts, indicating poor weather had less of an impact, the report showed. Work began on 22.2 percent fewer houses in the Midwest, while the Northeast and West also decreased. The South showed a 6.5 percent gain.

Figures Tuesday showed homebuilder sentiment waned to a four-month low in February as frigid winter weather kept prospective customers from touring new developments. The National Association of Home Builders/Wells Fargo confidence gauge fell to 55 from 57 the prior month. Readings greater than 50 mean more respondents report market conditions are good.

A strong labor market will probably help drive home sales and underpin building activity. Payrolls advanced by 257,000 in January, according to Labor Department figures, capping the biggest three-month gain in 17 years.

Housing Headwinds

Demand in the housing market still faces headwinds. Tight credit, a likely increase in borrowing costs as Federal Reserve policy makers begin to raise their benchmark interest rate and more expensive housing may restrain would-be homeowners at bay.

Home-price growth accelerated in much of the U.S. in the fourth quarter as low mortgage rates and improving employment prospects spurred demand. The median price of an existing single-family home rose from a year earlier in 86 percent of the 175 metropolitan areas measured, the National Association of Realtors said in Feb. 11 report. Twenty-four areas had price gains of 10 percent or more, up from 16 regions in the third quarter. Prices declined in 24 areas.

Borrowing costs that have been hovering near record lows are expected to increase when the Fed raises rates from near zero. The average rate on a 30-year fixed mortgage rose to 3.69 percent in the week ended Feb. 12 from 3.59 the week before, according to data from Freddie Mac in McLean, Virginia. It reached 3.31 percent in November 2012, the lowest in data going back to 1971.