Housing starts fell less than expected in July as builders broke ground on new multifamily units likely to meet demand for rental apartments, while permits for future construction dropped.

The Commerce Department said on Tuesday housing starts slipped 1.5 percent to a seasonally adjusted annual rate of 604,000 units, but above economists expectations for a 600,000-unit pace.

The report painted a picture of a housing market that continues to bounce along the bottom, swamped by an oversupply of unsold homes. Compared to July last year, residential construction was up 9.8 percent.

The market is continuing to adjust to a reduction in the national home ownership rate at the same time the supply of existing single-family homes remain excessive, said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York.

U.S. financial markets were little moved by the report as investors focused on weak euro zone growth data, which heightened fears the global economy might be slowing down much faster then previously thought.

U.S. data so far for the third quarter have painted a mixed picture of the economy which barely grew in the first half of the year. While there has been a moderation in the pace of layoffs in July and early August, the slowdown in manufacturing appears to be deepening.

A bloated inventory of unsold homes and a weak economy are weighing down on the housing market, whose collapse was the main catalyst of the 2007-09 recession. A large foreclosure pipeline also is not helping, leaving builders with little incentive to break ground on new projects.

Sentiment among home builders was steady at low levels in August, a survey showed on Monday, but they were pessimistic about sales over the next six months.

But demand for rentals, as Americans shun homeownership because of plummeting home prices and a 9.1 percent jobless rate, is stemming further declines in home construction.

Last month, housing starts for multi-family homes rose 7.8 percent to a 179,000-unit rate, and groundbreaking for projects with five or more units was the highest since January.

Single-family home construction -- which accounts for a large portion of the market -- dropped 4.9 percent to a 425,000-unit pace.

New building permits fell 3.2 percent to a 597,000-unit pace last month. Economists had expected overall building permits in July to fall to a 605,000-unit pace.

Permits were dragged down by a 10.2 percent drop in the multi-family segment. Permits to build single-family homes rose 0.5 percent.

New home completions increased 11.8 percent to 636,000 units in July, the highest since June 2010.

(Reporting by Lucia Mutikani, Additional reporting by Angela Moon in New York; Editing by Andrea Ricci)

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