WASHINGTON (Reuters) - U.S. single-family homebuilding plunged to a near 2-1/2-year low in August amid a glut of unsold new houses, suggesting the housing market could remain an economic headwind this quarter.  

The report from the Commerce Department on Wednesday also showed permits for future single-family home construction dropped last month to the lowest level in more than two years. Some economists said the decline was necessary to manage new housing inventory, currently near levels last seen in late 2007.

"Builders have been plagued with excessive new home inventories for going on about 18 months now," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.

"They have made a few half-hearted and ineffective stabs at slowing construction activity, but persistent hopes that homebuyer demand would perk up have been repeatedly dashed. It is past time that builders bite the bullet and cut back on the number of homes they are starting to get inventories under control."

Single-family housing starts, which account for the bulk of homebuilding, fell 7.0% to a seasonally adjusted annual rate of 890,000 units last month, the Commerce Department's Census Bureau said. That was the lowest level for single-family starts since April 2023. 

Groundbreaking for single-family housing projects tumbled 17.0% in the densely populated South, where economists said most of the over-building had occurred amid a labor market boom. But the region has experienced a significant decline in job openings this year. Homebuilding rose in the Northeast, Midwest and West.

Starts for housing projects with five units or more declined 11.0% to a rate of 403,000 units. This multifamily housing segment is extremely volatile. Overall housing starts decreased 8.5% to a rate of 1.307 million units. 

Economists polled by Reuters had forecast housing starts falling to a rate of 1.365 million units. Economists hoped a recent sharp decline in mortgage rates in anticipation of the Federal Reserve resuming its interest rate cutting cycle would revive the housing market.

The U.S. central bank is expected to deliver a quarter-percentage-point interest rate cut on Wednesday to support the labor market. The Fed paused its easing cycle in January because of uncertainty over the inflationary impact of President Donald Trump's import tariffs. 

THE HOUSING MARKET IS IN A SLUMP

Stocks on Wall Street were mixed as investors awaited the Fed's rate decision and summary of new economic projections from policymakers. The dollar rose against a basket of currencies. U.S. Treasury yields were little changed.

The housing market has been in a prolonged slump as the Fed aggressively hiked rates to combat inflation. The relief from easing mortgage rates is, however, likely to be limited by tepid job gains and rising unemployment as companies hold off hiring because of an uncertain economic outlook. 

Falling new house prices and shortages of construction workers as the Trump administration rounds up undocumented immigrants could also constrain homebuilding.

The rate on the popular 30-year mortgage has dropped to an 11-month low of 6.35% last week from around 7.04% in mid-January, data from mortgage finance agency Freddie Mac showed.

Permits for future single-family homebuilding decreased 2.2% to a rate of 856,000 units, the lowest level since March 2023. Single-family building permits dropped in the South, Northeast and West. They rose in the Midwest. 

A National Association of Home Builders survey on Tuesday showed sentiment among homebuilders remained subdued in September, though expectations for higher sales over the next six months improved. Builders are increasingly cutting prices and offering other incentives to reduce the inventory bloat.

The number of single-family houses approved for construction that were yet to be started slipped 1.5% to 133,000 units. The completions rate for that housing segment surged 6.7% to 1.090 million. The inventory of single-family housing under construction fell 2.1% to a rate of 611,000 units, the lowest level since January 2021.

Building permits for multi-family housing units plunged 6.7% to a rate of 403,000 units. Overall building permits decreased 3.7% to a rate of 1.312 million units, the lowest level since May 2020. Residential construction contracted in the first half of the year and is expected to again subtract from gross domestic product in the third quarter.

"Consumers' low confidence and heightened concerns about job security represent ongoing headwinds to demand," said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics. "We expect residential investment to remain a drag on GDP growth at least until mid-2026."