WASHINGTON (Reuters) -U.S. single-family homebuilding dropped to near a 1-1/2-year low in July due in part to Hurricane Beryl's disruption of activity, but rising new housing supply could limit a rebound.

The fifth straight monthly decline in homebuilding reported by the Commerce Department on Friday suggested the housing market remained depressed at the start of the third quarter. Aside from the weather, the housing market remains constrained by higher mortgage rates and house prices.

"Even though lower interest rates should provide ongoing support to new home sales, the existing oversupply in some regional markets could be a bigger constraint than we previously anticipated," said Paul Ashworth, chief North America economist at Capital Economics.

Single-family housing starts, which account for the bulk of homebuilding, tumbled 14.1% to a seasonally adjusted annual rate of 851,000 units last month, the lowest level since March 2023, the Commerce Department's Census Bureau said.

Single-family homebuilding plunged 22.9% in the densely populated South, likely depressed by Beryl, which struck Texas early in the month. Starts also plummeted 27.1% in the Northeast. They slipped 1.4% in the West, but increased 16.8% in the Midwest.

Single-family housing starts dropped 14.8% on a year-on-year basis in July. The housing market has weakened following a spring resurgence in mortgage rates. Residential investment, which includes home building, contracted in the second quarter after rising for three consecutive quarters.

"Residential housing construction will not be contributing anything to this quarter's real GDP growth," said Christopher Rupkey, chief economist at FWDBONDS.

Mortgage rates have since retreated amid optimism the Federal Reserve will cut interest rates next month. But a jump in new housing inventory to levels last seen in early 2008 could limit any rebound in housing starts.

SUPPLY CONCERNS

New construction had been buoyed by a dearth of previously owned homes for sale. But the stock of existing homes has also risen from historic lows. The average rate on the 30-year fixed-rate mortgage has declined to 6.45% from a peak of 7.22% in May.

A National Association of Home Builders survey on Thursday showed homebuilder sentiment fell to an eight-month low in August. Builders blamed "challenging housing affordability conditions" for the fourth straight monthly drop in confidence.

"It is costly for builders to keep finished homes on the market, builders appear to be increasingly hesitant to put further resources into building up the supply of new homes," said Daniel Vielhaber, an economist at Nationwide.

Starts for housing projects with five units or more increased 11.7% to a rate of 363,000 units in July. Overall housing starts plunged 6.8% to a rate of 1.238 million units, the lowest level since May 2020. Economists polled by Reuters had forecast starts would fall to a rate of 1.330 million units.

Starts were down 16.0% from a year ago. Permits for future construction of single-family homes slipped 0.1% to a rate of 938,000 units in July. Multi-family building permits dropped 12.4% to a rate of 408,000 units. Building permits as a whole decreased 4.0% to a rate of 1.396 million units.

The number of houses approved for construction that were yet to be started increased 2.6% to 279,000 units. The single-family homebuilding backlog rose 5.1% to 143,000 units.

The completions rate for that housing segment rose 0.5% to 1.054 million units. Overall housing completions declined 9.8% to a rate of 1.529 million units.

The number of housing units under construction decreased 1.6% to a rate of 1.539 million units. The inventory of single-family housing under construction slipped 2.1% to a rate of 653,000 units.