WASHINGTON (TheStreet) -- Homebuilders began construction on 1.5% fewer homes in July while applications for building permits fell 3.2%.

The Commerce Department said early Tuesday that housing starts came in at a seasonally adjusted annual rate of 604,000 in July. The figure compares with a revised June rate of 613,000 housing starts and came in slightly worse than the rate of 608,000 economists had expected, according to consensus estimates listed on Briefing.com. The housing starts rate in June was originally reported at a pace of 629,000.

Applications for building permits fell 3.2% to a seasonally adjusted annual rate of 597,000, lower than the revised June rate of 617,000, and lower than the expected rate of 606,000. June's building permits rate was originally reported at 624,000. Building permits are viewed as an indication of future home construction.

On Monday, data showed that homebuilder sentiment held steady at a low reading of 15 in August as the usual suspects of an oversupply of homes, inaccurate appraisal values and tight lending kept home purchasers at bay.

"Builders continue to confront the same major challenges they have seen over the past year, including competition from the large inventory of distressed homes on the market, inaccurate appraisal values, and issues with their buyers not being able to sell an existing home or qualify for favorable mortgage rates because of overly tight underwriting requirements," said Bob Nielsen, chairman of the National Association of Home Builders (NAHB) and a homebuilder from Reno, Nev.

The NAHB Housing Market Index measure builder perceptions of current single-family home sales and sales expectations for the next six months. Any reading below 50 indicates poor sentiment. The index has not been above 50 since April 2006.

The housing and homebuilding sector is well off its 2010 spring peak, ahead of expiring tax credits, and is only slightly higher than at the beginning of 2010. Whereas other sectors have begun an economic rebound in earnest, the housing sector continues to lag as a bloated supply of homes for sale -- both newly built and previously owned -- coupled with depressed pricing from foreclosures pressure the market.

The SPDR S&P Homebuilders ( XHB - Get Report), an exchange-traded fund that tracks the homebuilder sector, remains around 60% off its peak of $46.08 in early 2006. The iShares Dow Jones U.S. Home Construction ( ITB - Get Report) ETF remains more than 70% off its peak of $50.10 in the spring of 2006.

Among individual builders, stocks were mixed ahead of the opening bell Tuesday. PulteGroup ( PHM - Get Report) fell 2.1% in premarket trading, D.R. Horton ( DHI - Get Report) edged 0.1% lower, Lennar ( LEN - Get Report), largely considered a leader among the homebuilders, and Toll Brothers ( TOL - Get Report) were flat ahead of the opening bell.

Small-cap builders KB Home ( KBH - Get Report) and Hovnanian Enterprises ( HOV - Get Report) were flat, while Beazer Homes ( BZH - Get Report) lost 3.2%.

-- Written by Miriam Marcus Reimer in New York.

>To contact the writer of this article, click here: Miriam Reimer.

>To follow the writer on Twitter, go to @miriamsmarket.

>To submit a news tip, send an email to: tips@thestreet.com.


>>See our new stock quote page.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.