Housing starts fell more than expected in August, reflecting the continued weakness in the real estate market.

Inventories, however, dropped from a year ago, signaling that homebuilders may be slowing down their development plans and helping to reduce the number of houses on the market.

Privately owned housing starts in August were at a seasonally adjusted annual rate of 1.67 million units, down 6% from the revised July estimate of 1.77 million and 19.8% below the August 2005 rate of 2.08 million, the U.S. Department of Commerce said Tuesday. Economists expected a rate of 1.75 million starts.

"This is showing that the housing market is weaker than many expect," says Phillip Neuhart, an economic analyst with Wachovia. The housing start number was the lowest since 2003.

"We really are at pre-housing boom levels now," he says.

But the report also held potentially good data for builders such as

Toll Brothers

(TOL) - Get Report

and

KB Home

(KBH) - Get Report

.

In August, housing completions were down 3.2% from July and 4.4% from a year earlier.

The report also said that privately owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 1.72 million, which was down 2.3% from July and 21.9% from a year earlier.

Hopefully, this is a sign that builders are seeing the slowdown in the market and are starting to slow inventory growth, Neuhart says.

Builder stocks were lower Tuesday. Toll Brothers dropped 3.8% to $27.10, KB Home fell 2.8% to $44.85,

Ryland

(RYL)

slid 3.8% to $44.34, and

Centex

(CTX)

was down 3.3% to $51.87.