By Shobhana Chandra and Bob Willis Oct. 17 (Bloomberg) -- Confidence among Americans fell by the most on record and single-family housing starts hit a 26- year low, posing an increasing threat to consumer spending that accounts for more than two-thirds of the economy. The Reuters/University of Michigan preliminary index of consumer sentiment fell to 57.5 this month from 70.3 in September. The measure averaged 85.6 last year. Construction of single-family homes dropped 12 percent last month to a 544,000 annual rate, the Commerce Department said in Washington. Today's figures show that the tightening credit crunch has spurred a further step down in the three-year real-estate recession. Falling property values, along with the crash in stocks, threaten to cause the first decline in consumer spending since 1991, and put pressure on the Federal Reserve to cut interest rates again this month. ``Even gasoline-price decreases were overpowered by the massive destruction of wealth,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York who used to work at the Fed. ``Things are pretty awful in the economy and that should make itself felt through weaker consumer spending.'' Treasuries were little changed after climbing earlier in the day. Benchmark 10-year note yields were at 3.95 percent at 11:54 a.m. in New York. The Standard & Poor's 500 Stock Index was down 0.2 percent at 944.7, after sliding as much as 2.9 percent earlier. Economists' Forecasts The confidence index was forecast to fall to 65, according to the median of 61 economists surveyed by Bloomberg News. Starts on all residential properties, including condominiums, slid to 817,000, below all 74 forecasts in a Bloomberg News survey. Builders will find it difficult to lure buyers into the market after stock prices plunged this month and banks made it harder to qualify for a mortgage. Declines in construction are likely to continue to hurt economic growth well into 2009, extending the housing slump into a fourth year. ``Builders have stopped building in large measure, but they waited too long to stop building,'' Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University, said in a Bloomberg Television interview. ``At this point they've got to clear the inventory.'' Recovery Delayed The biggest housing slump in a generation was showing signs of nearing a bottom when financial markets began to implode in September, leading to the government takeover of mortgage finance companies Freddie Mac and Fannie Mae, the failure of banks and a $700 billion government rescue plan this month. ``These things are putting a new nail'' in the real-estate market's coffin, David Seiders, chief economist at the National Association of Homebuilders, said in an interview on Bloomberg Television yesterday. ``This sort of vicious feedback loop is still in play.'' Building permits, a sign of future construction, dropped 8.3 percent to a 786,000 pace, matching the lowest level since November 1981. Starts of single-family homes dropped to record lows in three of four regions in September, led by a 24 percent slump in the Midwest. The University of Michigan's index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, dropped to 56.7 from 67.2. Record Low Its gauge of current conditions, which reflects Americans' perceptions of their financial situations and whether it is a good time to buy big-ticket items like cars, slumped to 58.9, the lowest level ever, from 75. There was mixed news on price expectations. Consumers said they projected an inflation rate of 4.5 percent over the next 12 months, compared with 4.3 percent in the September survey. Over the next five years, the figures tracked by Fed policy makers, Americans expected a 2.8 percent rate of inflation, down from the prior month and the slowest estimate in a year. Regular unleaded gasoline prices slid to an average $3.08 a gallon at the pump on Oct. 15, from $3.63 on Sept. 30, according to AAA. Shoppers are paring expenses. Sales at U.S. stores open at least a year rose 1 percent last week from a year earlier, slowing for the eighth time in nine weeks, the International Council of Shopping Centers and Goldman Sachs Group Inc. said in a statement on Oct. 14. Wal-Mart Stores Inc., the world's largest retailer, reaffirmed its profit forecast for the third quarter after shoppers seeking discounted groceries and household goods helped to boost the Bentonville, Arkansas-based company's September sales. Consumers ``continue to look for basics for their families,'' Eduardo Castro-Wright, Wal-Mart's U.S. stores chief, said in an Oct. 8 statement. To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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