updated 3/20/2007 2:25:35 PM ET 2007-03-20T18:25:35

New home construction rebounded in February following a steep January slide. But analysts pointed to a further decline in building permits as a worrisome signal of future problems for the troubled housing industry.

Construction of new homes and apartments rose 9 percent in February to a seasonally adjusted annual rate of 1.525 million units, the Commerce Department reported Tuesday. Construction had fallen by 14.3 percent in January to the slowest pace in more than nine years.

Even with the better-than-expected rebound, activity remained 28.5 percent below the level of a year ago, underscoring housing’s steep downturn.

Builders’ applications for new permits, considered a more reliable gauge of future activity, continued falling in February, dropping by 2.5 percent to an annual rate of 1.532 million units. That marked the 12th decline in the past 13 months in building permits.

The continued drop in permits was seen as a troubling sign that the fallout from the housing correction, which has already slowed economic growth considerably, is not over.

Patrick Newport, an economist with Global Insight, forecast that housing construction would decline by 19 percent this year, shaving overall economic growth by nearly 1 percentage point for the entire year.

Last year, housing construction fell by 12.9 percent, reflecting a sharp slowdown in sales of both new and existing homes as mortgage rates rose and demand slackened after five boom years.

Weakness in the subprime lending market, which provides loans to borrowers with poor credit, contributed to the Feb. 27 stock market plunge. The Dow Jones industrial average fell by 416 points, the biggest point drop in more than five years.

David Seiders, chief economist for the National Association of Home Builders, said the organization’s survey of builder sentiment tumbled in early March with many builders expressing concerns that tighter loan requirements, prompted by rising mortgage delinquencies, would hurt sales.

“About 30 percent of the builders responding to the survey said their sales have been adversely affected since the beginning of the year by the tightening of loan standards,” Seiders said.

Normally, the Federal Reserve could be expected to alleviate a credit crunch by cutting interest rates.

However, the central bank is expected to keep rates unchanged at the end of a two-day meeting on Wednesday out of concern that the slower economy has not sufficiently dampened inflation pressures. Two closely watched gauges of inflation at the wholesale and retail levels showed big gains in February.

By region of the country, the West led the gains in construction, posting a 26.4 percent jump, which was the best showing since January 1997. Construction activity was also up in the South, increasing by 18 percent, the biggest percentage gain in that region in nearly two years.

Construction fell by 29.7 percent in the Northeast, the biggest one-month plunge in that region since December 1990, while construction fell in the Midwest by 14.4 percent after an even bigger 16.4 percent January decline.

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