But driving the June decline was a more than 20 percent drop in condominium and apartment construction, which makes up a small but volatile portion of the housing market.

Construction of single-family homes, the largest part of the market, was down slightly. It dropped 0.7 percent.

Overall, construction of new homes and apartments in June fell 5 percent from a month earlier to a seasonally adjusted annual rate of 549,000, the Commerce Department said Tuesday. May's figure was revised downward to 578,000.

Homebuilders are struggling to compete with a glut of homes on the market, many of them foreclosures or deeply discounted properties.

The number of foreclosures could rise even faster, according to a new report on the Obama administration's flagship effort to help those at risk of losing their homes. More than 40 percent of those who have enrolled have dropped out of the program, the Treasury Department said Tuesday.

One bright area of the new home construction report was an increase in building permit applications, which are a sign of future activity. They rose 2.1 percent from a month earlier to an annual rate of 586,000, however this was also driven by apartment construction.

A slumping job market and competition from foreclosed properties have forced builders to limit construction, especially after tax credits that spurred sales expired at the end of April.