Developers began construction at a seasonally adjusted annual rate of 836,000 homes in June, the Commerce Department said Wednesday. That was nearly 10 percent below May's total of 928,000, which was revised higher, and was the fewest since August 2012.
Most of the drop occurred in apartments, where starts fell almost 27 percent in June from May. Apartment construction is volatile from month-to-month.
Applications for permits to build single-family homes rose for the third straight month to 624,000, the highest since May 2008. That suggests home construction should rebound in the coming months. Overall permits fell to 911,000 in June from 985,000 in May, which was also revised higher.
Despite June's decline, builders started work on 10 percent more homes last month compared with a year earlier. And permits are 16 percent higher than a year ago.
"Today's drop in starts is more a pause in an otherwise improving trend," said Jonathan Basile, an economist at Credit Suisse.
The uptick in permits for single-family home construction echoed a report Tuesday that showed confidence among homebuilders rose in June to its highest level since January 2006.
Measures of customer traffic, current sales conditions and builders' outlook for single-family home sales jumped to their highest levels in at least seven years, according to a survey by the National Association of Home Builders.
The housing recovery has been providing critical support to the economy at a time when manufacturing and business investment have stagnated.
One concern is that mortgage rates have started to rise from their record lows and could spike further if the Federal Reserve slows its stimulus. Average rates on a 30-year mortgage rose to 4.5 percent last week, the highest in two years, according to mortgage buyer Freddie Mac.
The Fed has been buying $85 billion a month in mortgage and long-term Treasury bonds to try to reduce long-term interest rates and encourage people and businesses to borrow and spend. Chairman Ben Bernanke said last month that the Fed could begin to reduce its bond buying later this year if the economy continues to strengthen.
But Bernanke said in prepared testimony Wednesday that the Fed's timetable for reducing its bond purchases is not on a "preset course" and will depend on how the economy performs.
Higher mortgage rates could slow the housing rebound, although most economists aren't yet concerned. They note that other factors are more important to the recovery, such as steady job gains, economic growth, and an increasing willingness among banks to lend.
The recent increase in rates could be encouraging many potential buyers to step up their efforts to find a home to purchase.
Steady job growth and low mortgage rates in the past year have fueled more home sales. The increased demand, along with a tight supply of homes for sale, has pushed home prices higher. That's encouraged builders to start more homes and create more construction jobs.
Rising home prices also tend to make homeowners feel wealthier and more likely to spend. That drives more growth because consumers' spending accounts for roughly 70 percent of economic activity.
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