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* Housing starts drop 8.7 percent in February
* Single-family starts decline 17 percent
* Building permits fall 1.6 percent
WASHINGTON, March 26 (Reuters) - U.S. homebuilding fell more than expected in February as construction of single-family homes dropped to more than a 1-1/2-year low, but the outlook for the housing market is improving amid declining mortgage rates.
Housing starts decreased 8.7 percent to a seasonally adjusted annual rate of 1.162 million units last month, the Commerce Department said on Tuesday. The percent decline was the largest in eight months, and bad weather could have contributed to the sharp drop in homebuilding last month.
Housing starts data for January and December were revised higher. Building permits fell 1.6 percent to a rate of 1.296 million units in February. While that was the second straight monthly drop in permits, they are now outpacing starts, which suggests a pickup in homebuilding in the months ahead.
Economists polled by Reuters had forecast housing starts falling to a pace of 1.213 million units in February.
The housing market hit a soft patch last year, squeezed by higher mortgage rates, pricey lumber, and land and labor shortages, which led to tight inventories and more expensive homes. But borrowing costs have eased as the Federal Reserve signaled it was halting further interest rates increases this year amid growing headwinds to the economy.
The 30-year fixed mortgage rate dropped to an average of 4.28 percent last week, the lowest in more than a year, from 4.31 in the prior week, according to data from mortgage finance agency Freddie Mac. House price inflation is also slowing.
LAND, LABOR SHORTAGES
Still, homebuilders remain constrained in their ability to construct more homes for the lower end of the market. A survey last week showed confidence among homebuilders was steady in March, with builders still complaining about the scarcity of skilled workers and land, as well as zoning restrictions in many major metro areas.
Investment in homebuilding contracted 0.2 percent in 2018, the weakest performance since 2010. The dollar was little changed against a basket of currencies after the housing starts data, while U.S. Treasury yields fell slightly.
Single-family homebuilding, which accounts for the largest share of the housing market, tumbled 17.0 percent to a rate of 805,000 units in February, the lowest level since May 2017. The percentage drop in single-family homebuilding was the largest since February 2015.
Single-family homebuilding fell in all four regions last month. Permits to build single-family homes were unchanged in February at a pace of 821,000. These permits are now leading housing starts, suggesting a rebound in single-family construction in the coming months.
Starts for the volatile multi-family housing segment jumped 17.8 percent to a rate of 357,000 units in February. Permits for the construction of multi-family homes fell 4.2 percent to a pace of 475,000 units last month.
Housing completions increased 4.5 percent to 1.303 million units in February, the most since January 2008. Multifamily home completions surged 40.4 percent to 473,000 units, the highest since April 1988.
Single-family home completions fell 10.0 percent to 816,000 units, indicating the inventory shortage could persist for a while. There was also a decrease in the number of homes under construction last month. (Reporting by Lucia Mutikani Editing by Paul Simao)