The nation's construction industry saw a larger-than-expected 5.2 percent drop in new housing starts in October, the first decline in four months, as the bite of higher mortgage rates began to take hold.

All regions of the nation reported fewer starts, with the Midwest's 9.6 percent decline the most severe. Further weakening is likely for the construction industry because fixed mortgage rates probably will increase to 10 percent by the end of 1995, said Lyle Gramley, a former Federal Reserve governor who works as a consulting economist for the Mortgage Bankers Association of America.

"It is causing a diminishing of traffic in the showrooms and some of the people who were marginal for qualifying for a mortgage are finding they can't qualify," said Richard H. Brown, president of Cambridge Homes in Libertyville. Cambridge, which has 13 developments under construction, will sell just under 700 homes this year.