Utah County saw a dramatic slowdown in new home construction in the first quarter from a year ago, as skittish builders took out fewer permits due to a severe glut of unsold inventory and weak new home sales, according to a local study released Wednesday.

Statewide, new home building activity is declining at a record-breaking pace not seen since the '80s, as conditions moved from what the study describes as "an orderly correction" to "a serious contraction."

The number of builder's permits for all residential types in Utah was down 58.2 percent in the first quarter from a year ago -- surpassing the previous record low in 1987, when new permit activity dropped 50.1 percent.

In the first quarter, only 2,234 new home permits were issued in Utah. New permits for single-family homes -- by far the weakest sector -- were down 65.2 percent in the first quarter from a year ago, breaking a 28-year record set in the second quarter of 1980 when the number of new home permits taken out dropped 56.4 percent.

"This is more than just a correction for what went on during the housing boom. It's a serious contraction caused by exogenous factors including the subprime lending crisis, which affected 15 percent to 20 percent of all mortgage loan originations in Utah," said James Wood, director of the University of Utah's Bureau of Economic and Business Research.

The slowdown in new home building in Utah began in earnest in the last quarter of 2007 as the housing market slowed after lending standards tightened in the wake of the national subprime mortgage meltdown. The northern Utah County area in particular led the state with the most unsold homes, largely because builders had flocked to build in what were then considered the fastest growing areas in the past few years. But when credit requirements tightened, and those buyers got shut out, the building was already underway. Compounding the problem further was a drop in affordability as home prices rose faster than wages in Utah.

"Utah County went up the most. So it had the most to fall," Wood said. In 2007, builders took out 3,500 new home permits in Utah County, where 25 percent of all new homes in the state were built.

According to Newreach, a Salt Lake City real estate research firm, the number of unsold new homes and condominiums in Utah County skyrocketed 275 percent to 982 in the first quarter from a year ago, and is down slightly from 987 in the fourth quarter. Lehi led the state for the second consecutive quarter with the greatest number of unsold new homes, accounting for a whopping 263 units, followed closely by Saratoga Springs with 204 units and Eagle Mountain with 157 units.

Todd Cook, vice president of research with Newreach, said the U. of Utah study showed "diligence and restraint on the part of builders in not bringing new inventory into the market."

He remains upbeat because buyer traffic is starting to pick up as the weather warms up and Utah's employment and population growth remains strong relative to the rest of the nation. "It will be hard for our economy, but residential construction workers are finding opportunities in the commercial sector, which remains strong," he said.

"This will be a very difficult year for home builders," Wood said. "But for home buyers, even with the decline in construction, there should be plenty of homes on the market to choose from, both new and existing. Prices will also be more negotiable."

But Jason Eldredge, executive vice president of sales for Newreach, sees limited downside in prices of new homes, especially those priced at $325,000 and below.

"New homes priced below the $325,000 price range are selling well. But those priced above $400,000 still have more room to drop," he said. "It really depends on the neighborhoods where the homes are located, and how anxious the builders are to sell the houses."

Cook said some builders have cut their prices by between $10,000 and $50,000 since last September to move their inventory.

"Higher-end homes in the $500,000 and above price range have seen a drop of $25,000 to $50,000, while new homes in the $215,000 and below price range dropped between $5,000 and $10,000," he said. "I don't think price reductions will continue because buyer traffic has increased and because the new permits have dropped."

Still, potentially weighing down prices is a rising number of homes in foreclosure in the state, Wood said.

According to the Mortgage Bankers Association, there are 7,000 mortgage loans out of a total of 440,000 in Utah in the fourth quarter that are either in foreclosure or are seriously delinquent.

In the first quarter, the number of default notices, which are issued when homeowners miss their mortgage payments for 60 days or more, nearly doubled to 613 in Utah County, from 365 a year ago, according to Newreach. That compares with 2,758 notices of default issued in the first quarter, compared with 2,076 a year ago. About 90 percent of homes under default notices tend to go into foreclosure, the company found.

If the housing slowdown continues to worsen, Eldredge sees the possibility of more consolidation in the building industry locally and nationally.

"Those builders with big market share will continue to increase their share because there'll be less options for buyers when the industry consolidates," he said. "Builders that are holding expensive lot inventory priced at $100,000 and above, or expensive home inventory of $400,000 and above will either have to reduce those prices or consolidate if they can't get rid of the inventory."