A house under construction is seen in Los Angeles
A house under construction is seen in Los Angeles, California, U.S., June 22, 2022.

U.S. homebuilding fell to the lowest level in nearly 1-1/2 years in July, weighed down by higher mortgage rates and prices for construction materials, suggesting the housing market could contract further in the third quarter.

The report from the Commerce Department on Tuesday also showed permits for future home construction slipping to a 10-month low, with the decline concentrated in the single-family housing segment. The housing market has been hardest hit by the Federal Reserve's aggressive interest rate increases, aimed at cooling the economy in order to tame inflation.

Housing starts plunged 9.6% to a seasonally adjusted annual rate of 1.446 million units last month, the lowest level since February 2021. Data for June was revised slightly higher to a rate of 1.599 million units from the previously reported 1.559 million units. Economists polled by Reuters had forecast starts declining to a rate of 1.540 million units.

Single-family housing starts, which account for the biggest share of homebuilding, dropped 10.1% to a rate of 916,000 units, the lowest level since June 2020. Single-family homebuilding decreased in the Midwest and the densely populated South, but rose in the West and Northeast.

Starts for housing projects with five units or more declined 10.0% to a rate 514,000 units. Multi-family housing construction remains supported by strong demand for rental apartments, with rising borrowing costs pushing homeownership out of the reach of many Americans.

Permits for future homebuilding fell 1.3% to a rate of 1.674 million units. Single-family building permits fell 4.3% to a rate of 928,000 units. Permits for housing projects with five units or more increased 2.5% to a rate of 693,000 units.

The Fed, which is struggling to bring inflation back to the U.S. central bank's 2% target, has hiked its policy rate by 225 basis points since March. Mortgage rates, which move in tandem with U.S. Treasury yields, have soared even higher.

The 30-year fixed-rate mortgage is hovering around an average of 5.22%, up from 3.22% at the start of the year, according to data from mortgage finance agency Freddie Mac.

Residential fixed investment declined at its steepest pace in two years in the second quarter and more pain is coming.

A survey on Monday showed the National Association of Home Builders/Wells Fargo Housing Market sentiment index fell for an eighth straight month in August, dropping below the break-even level of 50 for the first time since May 2020. Rising construction costs and mortgage rates were largely blamed.

With costs mounting and labor still in short supply, the construction backlog continued to climb in July.

The number of houses approved for construction that are yet to be started surged 5.0% to 296,000 units. The single-family housing backlog increased 2.1% to 146,000 units. The backlog should keep homebuilding from an outright collapse.