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* Housing starts fall 0.3 percent in March
* Building permits decline 1.7 percent
* Single-family starts drop 0.4 percent
WASHINGTON, April 19 (Reuters) - U.S. homebuilding dropped to a near two-year low in March, pulled down by persistent weakness in the single-family housing segment, suggesting the housing market continued to struggle despite declining mortgage rates.
Some of the weakness in homebuilding reported by the Commerce Department on Friday likely reflected disruptions caused by massive flooding in the Midwest, with housing starts in the region declining to levels last seen in early 2015. The report bucked a recent tide of upbeat data that indicated the economy regained speed as the first quarter ended.
Housing starts fell 0.3 percent to a seasonally adjusted annual rate of 1.139 million units last month, the lowest level since May 2017. Data for February was revised down to show homebuilding tumbling to a pace of 1.142 million units instead of the previously reported 1.162 million-unit rate.
Housing starts in the Midwest, which was devastated by floods during the month, dropped 17.6 percent.
Building permits fell 1.7 percent to a rate of 1.269 million units in March, the lowest in five months. Building permits have now declined for three straight month. Permits for single-family housing dropped to a more than 1-1/2-year low in March, a bad omen for starts in the coming months.
Economists polled by Reuters had forecast housing starts increasing to a pace of 1.230 million units in March.
The prolonged weakness in homebuilding likely reflects land and labor shortages, as well as expensive building materials.
A survey on Tuesday showed that though builders reported strong demand for new homes, they continued to highlight "affordability concerns stemming from a chronic shortage of construction workers and buildable lots."
LOW MORTGAGE RATES
The 30-year fixed mortgage rate has dropped from a peak of about 4.94 percent in November to around 4.12 percent, according to data from mortgage finance agency Freddie Mac. Declining mortgage rates reflect a recent decision by the Federal Reserve to suspend its three-year monetary policy tightening campaign.
The housing market hit a soft patch last year, with investment in homebuilding contracting 0.3 percent, the weakest performance since 2010. After stumbling at the turn of the year, other sectors of the economy are regaining momentum.
Retail sales surged in March and trade, inventory and construction spending data have also been bullish, prompting economists to sharply upgrade their gross domestic product estimates for the first quarter.
Growth forecasts for the January-March quarter have been raised to as high as a 2.9 percent annualized rate. They were at one point as low as a 0.3 percent rate following a batch of weak economic reports at the turn of the year. The economy grew at a 2.2 percent rate in the fourth quarter.
Single-family homebuilding, which accounts for the largest share of the housing market, dropped 0.4 percent to a rate of 785,000 units in March, the lowest level since September 2016.
Single-family homebuilding in the Midwest tumbled 21.2 percent last month to the lowest level since February 2015. Single-family starts also fell in the populous South. But they rose in the Northeast and West.
Permits to build single-family homes dropped 1.1 percent to a rate of 808,000 units in March, the lowest since August 2017. Single-family home building permits have now declined for four straight months.
Starts for the volatile multi-family housing segment were unchanged at a rate of 354,00 units in March. Permits for the construction of multi-family homes dropped 2.7 percent to a pace of 461,00 units last month.
(Reporting By Lucia Mutikani; Editing by Andrea Ricci)