WASHINGTON, Aug 18 (Reuters) - U.S. homebuilding fell more than expected in July, the latest indication that surging construction costs and home prices continued to constrain the housing market early in the third quarter. Housing starts dropped 7.0% to a seasonally adjusted annual rate of 1.534 million units last month, the Commerce Department said on Wednesday. Data for June was revised up to a rate of 1.650 million units from the previously reported 1.643 million units. Economists polled by Reuters had forecast starts would fall to a rate of 1.600 million units. Permits for future homebuilding rose 2.6% to a rate of 1.635 million units in July. The report followed on the heels of a survey from the National Association of Home Builders on Tuesday showing confidence among single-family homebuilders dropped to a 13-month low in August because of higher material costs and home prices, which are cooling demand for houses. “Clearly, the panic buying and huge price increases we saw over the past year had to come to an end, and it is doing just that,” said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania. “It’s unclear, though, how big a slide will follow.” Building costs remain an issue even though lumber futures have tumbled from a record high of $1,711 per thousand board feet in May, with the contract for delivery in November trading at around $483 as of Tuesday. Land and labor shortages persist. Homebuilding has struggled to gain traction since racing to a rate of 1.739 million units in March, which was the highest level since June 2006. Housing demand boomed during the COVID-19 pandemic, which fueled a migration from cities to the suburbs and other low-density areas as Americans sought spacious accommodations for home offices and schooling. The robust demand, also driven by record low mortgage rates, far outpaced supply, leading to double-digit annual growth in home prices. But the pandemic tailwind is gradually fading as vaccinations allow companies to recall workers back to offices in city centers and schools reopen for in-person learning for the new academic year. Potential homebuyers are also balking at the high house prices. Residential investment contracted in the second quarter after three straight quarters of double-digit growth. (Reporting by Lucia Mutikani Editing by Paul Simao) Our Standards: The Thomson Reuters Trust Principles.