updated 1/19/2006 9:27:25 AM ET 2006-01-19T14:27:25

Construction of new single-family homes surged to an all-time high in 2005 but construction activity fell sharply in December, sending a signal that the nation’s long housing boom could be cooling off.

The Commerce Department reported that construction of new homes and apartments fell by 8.9 percent last month, the biggest decline in nine months.

Even with the December weakness, construction was started on 2.064 million single-family homes and apartments last year, the second-highest level on record, exceeded only by 2.356 million units built in 1972. Construction of just single-family homes set a record last year of 1.714 million units, up 6.4 percent from the previous record set in 2004.

Housing construction has boomed in recent years as builders have rushed to meet soaring demand triggered by the lowest mortgage rates in a generation. Sales of both new and existing homes have been at record levels for five straight years.

However, economists are forecasting that construction and sales activity will slow this year under the weight of rising mortgage rates. The big question is whether the slowdown will be gradual or something more severe.

Most economists are forecasting a gradual slowing of sales with a drop of around 6 percent this year. They believe price gains will slow from the double-digit pace of recent years but they are not forecasting a precipitous drop in home prices.

The 8.9 percent drop in construction activity in December was more than double the decline that analysts had been forecasting. It was blamed in part on wet and cold weather in December, which followed an unseasonably warm November when builder activity had risen by 3.4 percent.

For December, builders began construction on single-family homes at a seasonally adjusted annual rate of 1.577 million units, a sharp drop of 12.3 percent from November. Construction was started on multi-family units at a seasonally adjusted annual rate of 356,000 units in December, which represented an increase of 10.2 percent from the November pace.

Applications for building permits, considered a good indicator of future activity, fell by 4.4 percent in December to an annual rate of 2.068 million units.

Construction activity fell in every part of the country except the South where building rose by 5.2 percent, a gain that may have reflected the start of rebuilding following last fall’s devastating hurricanes.

Construction activity fell by 23.6 percent in the Midwest and was down 21.7 percent in the West and 14 percent in the Northeast.

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