WASHINGTON (Reuters) - U.S. construction spending fell more than expected in July as higher mortgages and increased supply weighed on single-family homebuilding.

The Commerce Department's Census Bureau said on Tuesday that construction spending dropped 0.3% after being unchanged in June. Economists polled by Reuters had forecast construction spending dipping 0.1%. Construction spending increased 6.7% year-on-year in July.

Spending on private construction projects decreased 0.4% in July. Investment in residential construction also fell 0.4%.

Outlays on new single-family construction projects plunged 1.9%. Spending on multi-family housing was unchanged. A surge in mortgage rates in the spring weighed on homebuilding and sales, leading to an inventory overhang in some regions.

The excess supply and weak demand has forced builders to hold back breaking ground on new projects. Single-family homebuilding dropped to a 16-month low in July, with inventory near levels last seen in early 2008.

Residential investment, which includes homebuilding, contracted in the second quarter after double-digit growth in the January-March quarter. Mortgage rates have since dropped to 16-month lows amid expectations the Federal Reserve will start cutting interest rates this month.

Spending on private non-residential structures like factories dropped 0.4% as the boost from a drive by President Joe Biden's administration to bring semiconductor manufacturing back to the United States fades.

Investment in public construction projects edged up 0.1%. State and local government spending slipped 0.1% and outlays on federal government projects jumped 2.1%.