By Lucia Mutikani

WASHINGTON (Reuters) -U.S. homebuilding rebounded less than expected in May as very expensive lumber and shortages of other materials continued to constrain builders’ ability to take advantage of an acute shortage of houses on the market.

The report from the Commerce Department on Wednesday also showed permits for future home construction falling to a seven-month low. Housing completions also declined while the number of homes authorized for construction but not yet started rose to the highest level since 1999, indicating supply will likely remain tight for a while and boost house price inflation.

“Shortages of materials and labor have builders struggling to increase production of new homes, though the demand remains strong,” said Robert Frick, corporate economist at Navy Federal Credit Union in Vienna, Virginia. “Potential home buyers should expect tight inventories and rising prices for both new and existing homes for the foreseeable future.”

Housing starts rose 3.6% to a seasonally adjusted annual rate of 1.572 million units last month. Data for April was revised down to a rate of 1.517 million units from the previously reported 1.569 million units.

Groundbreaking activity rose in the Midwest, the West and the densely populated South, but fell in the Northeast.

Economists polled by Reuters had forecast starts increasing to a rate of 1.630 million units. Last month’s increase still left starts below March’s rate of 1.725 million units, which was the highest level since June 2006. Building starts, however, jumped 50.3% on a year-on-year basis in May.

Though lumber prices dropped from a record high set in early May, softwood lumber prices increased 154.3% year-on-year in May, according to the latest producer pricer data.

A survey from the National Association of Home Builders on Tuesday showed confidence among single-family homebuilders fell to a 10-month low in June.

The NAHB blamed the ebb in sentiment on “higher costs and declining availability for softwood lumber and other building materials,” noting that was driving up prices of new houses “which has slowed the strong pace of home building.”

Tariffs on steel imports are also adding to building costs.

U.S. stocks opened lower as investors awaited hints from the Federal Reserve on when it would start tapering its massive bond buying program. The dollar was steady against a basket of currencies. U.S. Treasury prices rose.

DEMAND BOOM

Demand for bigger and more expensive accommodations amid the COVID-19 pandemic, which has left millions of Americans still working from home, is driving a housing market boom. But supply is tight, with the inventory of previously owned homes near record lows.

Permits for future homebuilding fell 3.0% to a rate of 1.681 million units in May. Building permits surged 34.9% compared to May 2020. They are running slightly ahead of starts, suggesting moderate gains in homebuilding in the months ahead.

Single-family homebuilding, the largest share of the housing market, increased 4.2% to a rate of 1.098 million units in May.

Building permits for single-family homes fell 1.6% to a rate of 1.130 million units. The number of housing units authorized to be built but not started increased 0.8% to a rate of 238,000 at the end of May, the highest since the government started tracking the series in January 1999.

The housing market has been the star performer in the economy’s recovery from the COVID-19 recession, which started in February 2020. Residential construction investment has enjoyed double-digit growth since the third quarter of last year. Most economists expect housing will have a neutral impact on gross domestic product growth in the second quarter.

Starts for the volatile multi-family segment rose 2.4% to a pace of 474,000 units in May. Building permits for multi-family housing projects dropped 5.8% to a rate of 551,000 units. With millions of Americans vaccinated against COVID-19 and the economy reopening, people are returning to cities.

Housing completions fell 4.1% to a rate of 1.368 million units last month. Single-family home completions dropped 2.6% to a rate of 978,000 units.

Realtors estimate that single-family housing starts and completion rates need to be in a range of 1.5 million to 1.6 million units per month to close the inventory gap.

The stock of housing under construction rose 0.5% to a rate of 1.324 million units last month.

(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)