Home construction fell a sharp 7% in July as homebuilders struggled to cope with a variety of headwinds.

The July decline put home construction at a seasonally adjusted annual rate of 1.53 million units, the Commerce Department reported Wednesday. It was the slowest pace since April but was 2.5% higher than a year ago.

Applications for building permits, which can forecast future activity, rose 2.6% in July from the June level to an annual rate of 1.64 million units. It was the first monthly increase in permit applications since March.

Construction starts for single-family homes fell 4.9% in July to an annual rate of 1.11 million while construction of apartments of five units or more dropped 13.6% to a rate of 412,000 units.

Home construction was down in every part of the country except the South where housing starts rose 2.1%. The biggest decline was in the Northeast, a drop of 49.3%, followed by declines of 11.3% in the West and 6.9% in the Midwest.

According to a survey of builder confidence, expectations fell sharply in August to the lowest level in a year as builders struggled with high costs, supply shortages and rising home prices. Expectations dropped five points to a reading of 75 in the National Association of Home Builders/Wells Fargo survey.

While the peak of the housing frenzy may be past, economists believe strong demand will continue to drive the market.

“Housing demand and sparse inventory will give builders strong reasons to maintain solid levels of construction," said Oren Klachkin, lead U.S. economist at Oxford Economics. “However, high materials prices, a limited supply of workers and limited land availability will constrain activity.”

Also on Wednesday, the Mortgage Bankers Association reported that mortgage applications fell 3.9% last week to their lowest level in a month, reflecting a drop in refinancing applications as mortgage interest rates rose.