Developers began construction at a seasonally adjusted annual rate of 836,000 homes in June, the Commerce Department said Wednesday. That was nearly 10 per cent below May's total of 928,000, which was revised higher.
Most of the drop occurred in apartments, where starts fell almost 27 per cent.
Applications for permits to build single-family homes rose for the third straight month to 624,000, the highest since May 2008. 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 per cent more homes in June compared with a year earlier. And permits are 16 per cent higher than a year ago.
The housing recovery has been helping support the economy at a critical time when manufacturing and business investment have stagnated.
Steady job growth and low mortgage rates 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.
Confidence among homebuilders rose this month to its highest level since January 2006, according to a monthly survey by the National Association of Home Builders. Measures of customer traffic, current sales conditions and builders' outlook for single-family home sales over the next six months vaulted to their highest levels in at least seven years.
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 per cent of economic activity.
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 per cent this week, the highest in two years, according to mortgage buyer Freddie Mac.
Higher mortgage rates could slow the housing rebound, although most economists aren't 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.
Though new homes represent only a fraction of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to NAHB statistics.