Annual starts of new homes fell to the lowest level in more than 25 years at the end of the second quarter of 2008, according to a new industry report.

There were a total of 12,427 housing starts in the first six months of the year. Annual starts (single-family homes, town houses and duplexes, but not condominiums) for the previous 12 months were 22,262 units. Since the peak (first quarter of 2006), the rate of new-home construction has fallen 66 percent.

During the 12 months ending in June 2008, new-home closings totaled 16,967 units, a 33 percent drop from the previous year.

"While builder cutbacks and discounted pricing are having an effect on reducing the inventory of homes, the tightening of credit standards has removed a sizable number of formerly qualified buyers from the market," said Mike Inselmann, president of Metrostudy, a national housing tracking and consulting company which did the study.

"And the uncertainty surrounding Fannie Mae and Freddie Mac represents additional financial market problems," he said.

"Nevertheless, as these issues run their cycle, demographic trends keep marching forward, creating a pool of potential buyers for when credit normalcy and calmer consumer psychology return, setting the stage for strong housing demand in the United States. It is a matter of when, not if," he said.

In addition to a sluggish economy, the Chicago area housing market has had to deal with excess existing-home inventory, said Chris Huecksteadt, manager of Metrostudy's Chicago division.

Inventory levels rose during the first six months of the year, with the number of existing units listed for sale increasing to 55,000, up from 42,000 at the beginning of the year. With 44,000 annual sales, there is a 15-month supply of resale units in inventory.

Historically, a healthy Chicago market has posted a five- to eight-month supply of resale inventory.

With the dramatic slowdown in the pace of new-home construction and an increase in the inventory of vacant developed lots, the supply of lots has increased from an average of 16 to 18 months to a current 69-month supply. The number of lots has steadily risen since the end of 2005, from about 50,000 lots to the current total of 72,000 lots. Some outlying markets have lot inventories exceeding 72 months.

Since 2003, there has been a significant decline in housing starts with prices below $300,000. If homes were available in lower price ranges, the downturn experienced during the past two years would likely have been less severe, Huecksteadt said.

"In addition to the 72,000 fully improved lots, there are another 253,214 housing units proposed for development. This includes entitled lots [approved for development by the municipality, but the land is still vacant]. And it also includes projects that are in the earliest phases of planning. More than likely, many of theses projects will be tabled or abandoned," he said.

Without economic and job growth, there will be about 8,000 to 12,000 housing starts during the next few years, he said.

Amid a climate of high gas prices and foreclosures, will developers change where and how they build houses?

Some will, according to a survey of members of the National Association of Home Builders. The USA Today report surveyed 380 builders.

••25 percent said they would build smaller homes in the suburbs.

••25 percent said they would build smaller homes closer to cities.

••14 percent said they would build homes on smaller lots close to the city.

••10 percent said they would build homes on smaller lots in the suburbs.

"But 51 percent said they have no change in plans," said Gopal Ahluwalia, staff vice president for NAHB research. "This is just the beginning. More and more people will come to realize that what we're doing is not working."