Construction of new homes edged down in August for a second consecutive month, providing evidence that the nation's red-hot housing market may finally be cooling a bit.

The Commerce Department (search) reported that construction of new homes and apartments dropped 1.3 percent last month after a decline of 1.5 percent in July. The decrease was larger than had been expected and it marked the first back-to-back declines in housing starts in 17 months.

Analysts have for some time been forecasting that the supercharged housing market would slow, but they are not forecasting a repeat of the dramatic plunge in stock prices that occurred in 2000 with the bursting of a speculative bubble.

Instead, analysts believe that housing activity will post a more moderate slowdown with sales tapering off and the gains in home prices slowing and perhaps falling in some of the hottest sales areas.

Even with the back-to-back declines, housing construction (search) remained at a seasonally adjusted annual rate of 2.01 million units in August, the eighth month out of the past nine that starts have been above the 2-million mark.

The country has recorded four straight years of record sales of both new and existing homes and economists believe even with a slowdown in the second half of this year, sales are still on track to set another record. They are forecasting small sales declines for 2006.

The housing boom has been powered by the lowest mortgage rates in a generation. But the Federal Reserve (search) has been pushing short-term rates upward for the past 15 months and these gains are finally starting to show up as higher long-term mortgage rates.

Hurricane Katrina (search) is expected to have a short-term negative effect on housing by disrupting construction and sales activity in the devastated areas along the Gulf Coast. However, economists believe the massive rebuilding will bolster housing construction later this year and into 2006.

For August, construction of new single-family homes fell by 0.5 percent to 1.71 million units while construction of multifamily units was down a sharp 6 percent to 328,000 units.

By area of the country, construction rose by 13.3 percent in the West to an annual rate of 561,000 units. All other areas of the country posted declines in August from the level of activity in July.

Construction fell by 6.6 percent in the South to an annual rate of 915,000 units while building activity was down 5.2 percent in the Midwest to an annual rate of 346,000 units and down 4.1 percent in the Northeast, to an annual rate of 187,000 units.