Tried to adjust the height with no success after loosening #2 and trying to turn the body/shaft but it was nearly impossible to turn. Am I suppose to loosen #2 and then turn #1 with the wrench? Someone please show me how to properly adjust ride height with the coilovers installed. Thanks in advance.

 

Just to be clear, my plans are to raise the car about a 1/2 inch so would I turn the smaller bottom perch of the two that is circled and labelled 1, counterclockwise?

 

You would loosen number 2(lock nut) and turn number 1 to the right(as a whole). Also try cleaning and lubricating the threads to help it turn.

 

well....you do have some corrosion on there,... first i would soak it in liquid wrench or wd40,...
then i would (assuming you have proper preload on the spring) just loosen number 2 and rotate 3 to add height to your coilover.

 

Yeah, that looks like some pretty heavy corrosion/grime on the threads. Spray the heck out of them with WD-40 and try to clean the exposed threads as much as you can (maybe wire brush). Your method (and the methods posted by others) is correct, just must be locked down with corrosion.