WASHINGTON (Reuters) - U.S. construction spending increased more than expected in December, boosted by single-family homebuilding, but high mortgage rates could curb further gains in new residential construction.

The Commerce Department's Census Bureau said on Monday that construction rose 0.5% after an upwardly revised 0.2% increase in November. Economists polled by Reuters had forecast construction spending would advance 0.2% after being previously reported as unchanged in November. 

Construction spending increased 4.3% on a year-on-year basis in December. It advanced 6.5% in 2024.

Spending on private construction projects shot up 0.9%. Investment in residential construction rose 1.5%, with outlays on new single-family projects up 1.0%. New construction had been hampered in recent months by rising mortgage rates, which offset hopes among builders for less stringent regulations from President Donald Trump's administration.

Mortgage rates have risen in tandem with U.S. Treasury yields on economic resilience and investor worries that the new administration's trade and immigration policies could fan inflation and limit the Federal Reserve's scope to cut interest rates this year.

The U.S. central bank started its policy easing cycle in September, lowering rates by 100 basis points before pausing in January. The Fed hiked its policy rate by 5.25 percentage points in 2022 and 2023 to tame a surge in inflation. Trump on Saturday slapped 25% tariffs on Canadian and Mexican goods. The tariffs aimed at Canada could make lumber more expensive and new houses less affordable.

Outlays on multi-family housing units slipped 0.3% in December. Spending on home renovations increased. 

Investment in private non-residential structures like offices and factories edged up 0.1% in December.

Spending on public construction projects dropped 0.5% in December. State and local government spending fell 0.5%, while outlays on federal government projects decreased 0.2%.