(Adds mortgage applications, analyst comments, updates markets)
* Housing starts fall 4.8 percent in July
* Single-family starts slip 0.5 percent
* Building permits decrease 4.1 percent
WASHINGTON, Aug 16 (Reuters) - U.S. homebuilding unexpectedly fell in July as the construction of multi-family houses tumbled to a 10-month low, but strong job growth is expected to continue to support the housing market recovery.
Housing starts declined 4.8 percent to a seasonally adjusted annual rate of 1.16 million units, hurt also by a drop in groundbreaking on single-family projects, the Commerce Department said on Wednesday.
June's sales pace was revised down to 1.21 million units from the previously reported 1.22 million units.
Building permits dropped 4.1 percent, with the multi-family segment recording a drop of 11.2 percent. Permits for single-family homes were unchanged. The report tempered hopes of a sharp rebound in homebuilding investment after it fell in the second quarter at its steepest pace in nearly seven years.
"Soft July starts following on June's solid reading is a disappointment as we had expected housing to pick up more robustly from a soft second quarter," said Andrew Labelle, an economist at Citigroup in New York. "Still, we are inclined to look through some of the pullback as it was concentrated in generally lower value and more volatile multi-family."
Housing subtracted 0.27 percentage point from second-quarter gross domestic product. Economists had forecast groundbreaking activity to be little changed at a rate of 1.22 million units in July. Homebuilding fell 5.6 percent on a year-on-year basis.
Housing starts are well below their historic average of 1.5 million, a rate realtors say would eliminate an acute shortage of houses on the market that has driven up prices. Completions fell 6.2 percent to 1.18 million-pace last month.
The PHLX housing index was trading higher, in line with a broadly firmer U.S. stock market. Shares in the nation's largest homebuilder, D.R. Horton, were little changed as were those of Lennar Corp. Pultegroup shares gained 0.31 percent.
The dollar strengthened against a basket of currencies and prices for U.S. government bonds rose marginally.
A separate report on Wednesday from the Mortgage Bankers Association showed applications for home loans fell last week.
Single-family homebuilding, which accounts for the largest share of the housing market, slipped 0.5 percent to a rate of 856,000 units last month. Single-family starts rose in the Northeast and South but fell in the West and Midwest.
"We expect residential investment to keep moving up over time, although we believe the pace of growth will be modest," said Daniel Silver, an economist at JPMorgan in New York.
Despite strong demand for housing, which is being driven by a labor market that is near full employment, groundbreaking on single-family housing projects has slowed since racing to near a 9-1/2-year high in February.
Homebuilders continue to complain they cannot find skilled labor, especially framers, and that buildable lots remain in short supply. Builders also say the costs of their materials are rising. Prices for building materials were increasing even before the U.S. government slapped anti-subsidy duties on imports of Canadian softwood lumber in April.
A survey on Tuesday showed confidence among homebuilders increased in August amid rising demand for new houses.
Last month, starts for the volatile multi-family housing segment tumbled 15.3 percent to a rate of 299,000 units. Groundbreaking for buildings with five units or more plunged 17.1 percent to its lowest level since September 2016.
Multi-family homebuilding is slowing as apartment buildings flood the market, leading to a rise in the rental vacancy rate this year.
"The recovery in the multi-family sector may have played out and the sector is in the process of consolidating and finding a sustainable level of activity," said John Ryding, chief economist at RDQ Economics in New York.
(Reporting by Lucia Mutikani; Editing by Paul Simao)