As the US real estate market continues to see strong demand while grappling with supply bottlenecks and high prices, government data released Wednesday showed the pace of new homebuilding slowing in July.

Housing projects started last month fell seven percent compared to June to an annual rate of just over 1.5 million units, seasonally adjusted, the Commerce Department said, a drop far greater than economists had expected.

Fueled by bargain borrowing rates, home prices have risen steadily for months, as a struggle to find workers and shortages of lumber and other goods has eroded builder confidence and prompted some to put projects on hold, according to an industry survey.

That was reflected in the government data that showed new single-family projects fell 4.5 percent and construction started on apartments dropped 13.6 percent.

The Northeast saw the steepest declines, plunging 49 percent, while the South saw a small increase, according to the report.

US housing starts fell nationwide in July, except in the South which saw a modest increase US housing starts fell nationwide in July, except in the South which saw a modest increase Photo: GETTY / JOE RAEDLE

"Solid housing demand and sparse inventory will give builders strong reasons to maintain solid levels of construction," said Oren Klachkin of Oxford Economics. "However, high materials prices, a limited supply of workers and limited land availability will constrain activity."

But new building permits issued in the month rose 2.6 percent, breaking a string of declines and signaling more projects are in the pipeline.

Overall, housing starts are 2.5 percent above the same level of 2020.

Mike Fratantoni, chief economist of the Mortgage Bankers Association, said homebuilding should pick up as supply chain struggles ease.

"There are now almost 690,000 single-family homes under construction -- the largest number since 2007. This is clearly a positive sign given the remarkably low levels of inventory on the market," he said.