WASHINGTON - Construction of new homes fell in May as the nation's home builders were battered by the crisis in subprime lending and rising mortgage rates.

Housing, which is struggling through its biggest downturn in 16 years, is expected to continue to face troubles in the months ahead before starting to stage a sustained rebound in 2008.

The Commerce Department reported Tuesday that construction of new homes and apartments fell by 2.1 percent last month to a seasonally adjusted annual rate of 1.474 million units, 24.2 percent below the level of a year ago. May's decline was in line with expectations and reflected weakness in the South and West, which offset construction gains in the Northeast and Midwest.

Permits, considered a good barometer of future activity, rose 3 percent in May, but that followed a huge 7.1 percent plunge in April. The strength last month came from a rebound in permits for apartment construction, which can be volatile. Applications for single-family homes fell by 1.8 percent and have been down four of the past five months.

'The downward trend remains firmly in place, and there is no prospect of any near-term relief, given the huge inventory overhang in the new home market,' said Ian Shepherdson, chief U.S. economist for High Frequency Economics.

Home builders, struggling to reduce record levels of unsold homes, are slashing prices and offering a variety of sales incentives, such as kitchen upgrades and free decks, to do so.

But they face new problems with the recent spike in mortgage delinquencies, which means more homes dumped on the market. Also, there was a steady rise in mortgage rates in the past month, with Freddie Mac's national survey for 30-year mortgages hitting an 11-month high of 6.74 percent last week.

The National Association of Home Builders reported that its survey of builder sentiment sank in June to the lowest level in 16 years, a reading of 28, down from 30 in May. The three major components of the index - sales, sales expectations and buyer traffic - all posted declines. It was the lowest showing since February 1991, a period that covered the last major housing recession.

'The tightening in lending standards is having quite an impact,' said David Seiders, chief economist for the home builders. He predicted home sales would likely fall further in coming months with a sustained rebound not occurring until 2008.

Seiders said he looked for construction of new homes and apartments to decline by 22 percent this year after falling by 13 percent in 2006.

It appeared the housing slump was hitting bottom at the end of last year, but there has been a renewed drop in recent months triggered by problems in the mortgage industry. The level of late payments and foreclosures on subprime mortgages hit record highs in the first three months of the year, according to a Mortgage Bankers Association survey. The percentage of payments 30 or more days past due for subprime mortgages - loans made to borrowers with weak credit histories - rose to a record 15.75 percent in the January-March quarter.