New residential construction in the U.S. tumbled by much more than expected in the month of July, according to a report released by the Commerce Department on Tuesday.

The report showed housing starts plunged by 9.6 percent to an annual rate of 1.446 million in July after slumping by 2.4 percent to a rate of 1.559 million in June. Economists had expected housing starts to decline by 1.2 percent to a rate of 1.540 million.

With the much steeper than expected drop, housing starts dove to their lowest annual rate since hitting 1.430 million in February of 2021.

The Commerce Department said single-family housing starts plummeted by 10.1 percent to a rate of 916,000, while multi-family starts tumbled by 8.6 percent to a rate of 530,000.

Building permits, an indicator of future housing demand, also fell by 1.3 percent to an annual rate of 1.674 million after inching up by 0.1 percent to a revised rate of 1.696 million in June.

Economists had expected building permits to slump by 2.1 percent to an annual rate of 1.650 million from the 1.685 million originally reported for the previous month.

Single-family permits plunged by 4.3 percent to a rate of 928,000, more than offsetting a 2.8 percent jump in multi-family permits to a rate of 746,000.

"As housing activity continues to moderate under the weight of rising interest rates and a persistent shortfall in supply, we look for starts to lose further momentum over the coming months," said Mahir Rasheed, U.S. Economist at Oxford Economics.

He added, "However, with July's weakness in starts and August's deterioration in homebuilder sentiment, risks to the outlook are decidedly tilted to the downside."

A separate report released by the National Association of Home Builders on Monday unexpectedly showed a continued deterioration in U.S. homebuilder confidence in the month of August.

The report showed the NAHB/Wells Fargo Housing Market Index dropped to 49 in August from 55 in July. Economists had expected the index to come in unchanged.

With the unexpected decrease, the housing market index fell below the key break-even measure of 50 for the first time since May 2020.

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