* Housing starts drop 9.9 percent to lowest since August
* Permits fall 7.5 percent, multifamily segment a drag
* Rainy weather in some parts of the country may be a factor
By Lucia Mutikani
WASHINGTON, July 17 (Reuters) - U.S. housing starts and permits for future home construction unexpectedly fell in June, but the decline in activity was likely to be short-lived against the backdrop of bullish sentiment among home builders.
The Commerce Department said on Wednesday housing starts dropped 9.9 percent to a seasonally adjusted annual rate of 836,000 units. That was the lowest level since August last year.
Economists, who had expected groundbreaking to rise to a 959,000-unit rate, shrugged off the decline and said wet weather in many parts of the country had dampened activity. They noted that much of the drop was in the volatile multifamily segment.
“It looks like it’s weather-related,” said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. “On the surface it doesn’t look good, but we are confident that starts activity is still going to climb higher in the months to come.”
Permits to build homes fell 7.5 percent last month to a 911,000-unit pace. Economists had expected permits to rise to a 1-million unit pace.
Though it was the second straight month of declines in permits, they remained ahead of starts. Economists said this, together with upbeat homebuilder confidence, suggested groundbreaking activity will bounce back in July and through the remainder of this year.
Sentiment among single-family home builders hit a 7-1/2 year high in July, a report showed on Monday, amid optimism over current and future home sales.
That upbeat tone was also captured by a separate report from the Federal Reserve on Wednesday, which described residential construction as increasing at a moderate to strong pace across the country in June and early July.
There was little to suggest that a recent spike in mortgage rates was restraining home building activity, economists said, pointing to the improving builder confidence. Fed Chairman Ben Bernanke in his testimony before lawmakers said the central bank was monitoring developments in the mortgage market.
“Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates, but it will be important to monitor developments in this sector carefully,” Bernanke said.
Housing’s recovery is being been aided by the still-low mortgage rates engineered by the Fed’s very accommodative monetary policy and steady employment gains.
Mortgage rates increased in recent weeks after the U.S. central bank expressed its desire to start cutting back on its bond purchases later this year. The monthly $85 billion in bond purchases have been holding down interest rates.
Bernanke said the central bank still expected to start scaling back its massive asset purchase program later this year, but left open the option of changing that plan in either direction if the economic outlook shifted.
U.S. financial markets were little moved by the housing data, taking their cue from Bernanke’s comments. Stocks on Wall Street were trading mostly higher. U.S. Treasury debt prices rose and the dollar advanced against a basket of currencies.
Last month, groundbreaking for single-family homes, the largest segment of the market, slipped 0.8 percent to its lowest level since November 2012. Starts for multi-family homes declined 26.2 percent to a 245,000-unit rate.
Starts were down in all four regions in June, with big declines in the Northeast, South and the Midwest.
Weak groundbreaking suggested a smaller boost to both second and third quarter gross domestic product from residential construction. Second-quarter GDP growth estimates are ranging between 0.5 percent and 1 percent.
The economy grew at a 1.8 percent annual pace in the first three months of the year.
Permits for multi-family homes fell 21.4 percent last month. But permits for single-family homes rose 0.6 percent to their highest since May 2008, a hopeful sign for future construction.
“Since builders are under-supplying the market, inventories are likely to get leaner in the months ahead, and prices are likely to accelerate,” said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts. “This will bring more builders into the market.”