The Commerce Department reported that construction of new homes and apartments dropped by 3.7 percent last month to a seasonally adjusted annual rate of 1.187 million units.
Construction of single-family homes fell by 5.5 percent to an annual rate of 829,000 units, the lowest level since April 1991, while multi-family construction was up 4.4 percent to an annual rate of 332,000 units.
In a bad sign for future activity, the government reported that applications for building permits fell for a sixth straight month, dropping by 1.5 percent to a seasonally adjusted annual rate of 1.15 million units, the slowest pace for building permits since June 1993.
The overall construction decline left home building 24.2 percent below the level of activity a year ago. Housing has been in a serious downturn for the past two years following five boom years in which sales and home prices soared.
The slump has raised concerns that the economy could be pushed into a full-blown recession. Starting this summer, some of the nation's largest banks and investment firms have declared multibillion-dollar losses stemming from a surge of defaults on subprime mortgages, loans offered to borrowers with weak credit histories.
Those defaults have resulted in a severe credit crunch as banks and other lenders have tightened up on their loan standards, making credit hard to come by for many businesses and consumers. The Federal Reserve, worried that the credit crunch will add to the economy's other problems, is searching for innovative ways to pump more money into the financial system, including two unprecedented auctions this week totalling $40 billion.
The overall economy is expected to slow to growth of 1 percent or less in the current quarter. A similarly weak growth rate is forecast for the first three months of next year -- the point of maximum danger, many economists believe, that the country could dip into recession.
The new housing report showed that construction activity was down in all regions of the country expect the South, which saw a small 0.3 percent rise. Construction plummeted 16.3 percent in the Northeast and fell 6.9 percent in the West and 1.5 percent in the Midwest.
The National Association of Home Builders reported Monday that its index of builder sentiment remained at a record low in December for a third straight month.
The index remained at 19, the lowest reading since this gauge of builder optimism was created in 1985. The index has been below 50 since May 2006. Index readngs above 50 indicate positive sentiment among builders about future sales.
Builders have been slashing construction plans and offering numerous incentives in an effort to reduce record levels of unsold homes.
The concern is that the rising number of mortgage defaults will dump even more homes on an already glutted market.