WASHINGTON (Reuters) -U.S. single-family homebuilding increased in May, but a sharp drop in permits for future construction pointed to subdued housing market conditions amid headwinds from tariffs and excess inventory of unsold homes.

Single-family housing starts, which account for the bulk of homebuilding, rose 0.4% to a seasonally adjusted annual rate of 924,000 units last month, the Commerce Department's Census Bureau said on Wednesday.

President Donald Trump's import duties, including on lumber, aluminum and steel are raising construction costs for builders.

The tariffs have heightened uncertainty over the economy, which the Federal Reserve has responded to by pausing its interest rate cutting cycle. The U.S. central bank is later on Wednesday expected to leave its benchmark overnight interest rate in the 4.25%-4.50% range, where it has been since December.

Higher borrowing costs have sidelined potential buyers, boosting the supply of new single-family homes on the market to levels last seen in late 2007. A National Association of Home Builders survey on Tuesday showed sentiment among single-family homebuilders plummeted to a 2-1/2-year low in June. 

The NAHB reported an increase in the share of builders cutting prices to lure buyers, and forecast a decline in single-family starts this year.

Permits for future construction of single-family housing dropped 2.7% to a rate of 898,000 units in May.

Residential investment, which includes homebuilding, contracted slightly in the first quarter after rebounding in 2024 following steep declines in the prior two years caused by a surge in mortgage rates. 

"We appear on course for a substantial decline in real activity in the current quarter and perhaps further weakness in the summer," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.