Construction of new housing plunged in March. The slowdown is an indication the housing market could be slowing due to higher interest rates for home buyers and construction firms.

Housing starts fell 11.2% in March, which is the largest drop in six years, to an annual rate of 1.60 million, according to the

Commerce Department

. The news surprised Wall Street economists, who had been looking for starts to fall to 1.729 million, according to a

Reuters

poll.

The data might mean the housing market, a major driver of the booming U.S. economy that has so far shown little reaction to higher interest rates, might be falling from its heady levels.

But the report gave some indication that single-family housing starts might not keep plunging in months to come. The number of permits submitted for single-family homes remained steady in March at an annual rate of 1.220 million vs. 1.223 million in February. Permits for multiple-family dwellings, however, dropped off to 359 million, from 430 million in February.

"The housing market has probably peaked, but the expected major slowdown has not yet arrived," said Joel Naroff, president of

Naroff Economic Advisors

in Holland, Pa.

The

Federal Reserve

has raised interest rates by a total of 1.25 percentage points over the past 11 months in an attempt to slow economic growth and reduce the threat of widespread inflation. But Americans, rich with stock market gains and a favorable labor market, have been able to maintain their strong spending pace despite higher rates.

The Fed's interest rate hikes have sharply affected home mortgage rates. According to

Freddie Mac

, one of the largest U.S. home lenders, 30-year fixed mortgage rates averaged 8.24% in March, compared to 7.04% in March 1999.

Last Friday's sharp drop in stocks, and the wealth that it destroyed for many Americans, might also be a dragging factor on the housing market in months to come if the equities market remains weak.

While housing starts softened in March, the department revised its reading on Feburary starts upward to an annual rate of 1.807 million units from its previously reported 1.781 million.

The sharpest drop in housing starts came in multifamily units, which dropped 41% to an annual rate of 295,000 in March, following a 30.5% rise in February.

Starts for single-family homes rose 0.2% to an annual rate of 1.309 million.

Regionally, housing starts dropped most in the Midwest, which saw a 31.9% drop, followed by the Northeast, where starts dropped 18%. Construction activity in the South remained flat, while home starts dropped 4.5% in the West.