U.S. homebuilders are expecting a 3.4 percent drop in housing starts in 2003 as rising interest rates cool the U.S. passion for home-buying, a trade association said Wednesday.

That level is still "excellent" by historical standards, said National Association of Homebuilders Chief Economist David Seiders in prepared remarks.

The forecast assumes an unsteady U.S. economic recovery in which 30-year fixed-rate mortgage interest rates reach 6.5 percent by year's end. Home loan rates have scraped four-decade lows, hovering near 6 percent in recent weeks, although they jumped last week to 6.3 percent.

But Seiders cautioned that volatile financial markets mean uncertainty for housing activity.

"A sustained recovery in the stock market, if it materializes, will have a positive impact on the overall economy but will result in higher long-term rates, a combination that could have negative impacts on the interest-sensitive housing sector," he said.

Seiders forecasts an average annualized pace of housings starts over the four quarters of 2003 of 1.630 million. His forecast an average pace of 1.687 million units in 2002.

Housing has been one of the lone bright spots in a gloomy U.S. economic environment, and observers credit housing activity with keep the U.S. recession mild. Low interest rates spurred record levels of home buying and building as well as refinance activity in 2002.