By Lucia Mutikani

WASHINGTON (Reuters) -U.S. homebuilding increased more than expected in June, but permits for future home construction fell to an eight-month low, likely reflecting uncertainty caused by expensive building materials as well as shortages of labor and land.

The report from the Commerce Department on Tuesday suggested that a severe shortage of houses, which has boosted prices and sparked bidding wars across the country, could persist for a while. Demand for houses is being driven by low mortgage rates and a desire for more spacious accommodations during the COVID-19 pandemic.

Though lumber prices are coming down from record highs, builders are paying more for steel, concrete and lighting, and are grappling with shortages of appliances like refrigerators.

“Reports of multi-month delays in the delivery of windows, heating units, refrigerators and other items have popped up across the country, delaying delivery of homes and forcing builders to cap activity, and many builders continue to point to a shortage of available workers as a separate challenge,” said Matthew Speakman, an economist at Zillow.

Housing starts rose 6.3% to a seasonally adjusted annual rate of 1.643 million units last month. Data for May was revised down to a rate of 1.546 million units from the previously reported 1.572 million units. Economists polled by Reuters had forecast starts would rise to a rate of 1.590 million units.

Despite last month’s increase, starts remained below March’s rate of 1.737 million units, which was the highest level since July 2006. Homebuilding increased in the West and the populous South, but fell in the Northeast and Midwest.

Single-family starts rose 6.3% to a rate of 1.160 million units. The volatile multi-family homebuilding category advanced 6.2% to a pace of 483,000 units.

Starts increased 29.1% on a year-on-year basis in June.

Permits for future homebuilding fell 5.1% to a rate of 1.598 million units in June, the lowest level since October 2020. Permits are now lagging starts, suggesting that homebuilding will slow in the coming months.

U.S. stocks opened higher after Monday’s sharp selloff. The dollar gained versus a basket of currencies. U.S. Treasury yields fell.

BUILDERS CAUTIOUS

While lumber futures have dropped nearly 70% from a record high in early May, softwood lumber prices increased 125.3% on a year-on-year basis in June, according to the latest producer price data.

There are also signs that the exodus to suburbs and other low-density areas in search of larger homes for home offices and schooling is gradually fading as vaccinations allow companies to recall workers back to offices in city centers. Rising COVID-19 infections among unvaccinated Americans also pose a risk to the housing market outlook.

“Builders are more cautious and taking out fewer permits for new construction as the earlier confidence during the economy’s reopening has started to falter,” said Chris Rupkey, chief economist at FWDBONDS in New York.

The supply of previously-owned homes is near record lows, leading to double-digit growth in the median house price.

A survey from the National Association of Home Builders on Monday showed confidence among single-family homebuilders fell to an 11-month low in July. The NAHB noted that “builders continue to grapple with elevated building material prices and supply shortages, particularly the price of oriented strand board, which has skyrocketed more than 500 percent above its January 2020 level.”

Homebuilders and a group of other stakeholders met last Friday with White House officials, including Commerce Secretary Gina Raimondo and Housing and Urban Development Secretary Marcia Fudge, to discuss strategies to address the short-term supply chain disruptions in the homebuilding sector.

Building permits fell in all four regions in June. Single-family permits dropped 6.3% to a rate of 1.063 million units. Permits for multifamily housing slipped 2.6% to a rate of 535,000 units.

Housing completions fell 1.4% to a rate of 1.324 million units last month. Single-family home completions declined 6.1% to a rate of 902,000 units, the lowest level since October.

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 1.8% to a rate of 1.359 million units last month.

(Reporting by Lucia MutikaniEditing by Chizu Nomiyama and Paul Simao)