U.S. housing starts fell more than expected in August as building activity declined broadly after two straight months of solid increases, but a rebound in permits for single-family dwellings suggested demand for housing remained intact.

Groundbreaking decreased 5.8 percent to a seasonally adjusted annual pace of 1.14 million units, the Commerce Department said on Tuesday. July's starts were unrevised at a 1.21 million-unit pace.

Permits for future construction slipped 0.4 percent to a 1.14 million-unit rate last month as approvals for the volatile multi-family homes segment tumbled 7.2 percent to a 402,000 unit-rate. Permits for single-family homes, the largest segment of the market, surged 3.7 percent to a 737,000-unit pace.

Economists polled by Reuters had forecast housing starts falling to a 1.19 million-unit pace last month and building permits rising to a 1.17 million-unit rate.

Last month's decline in starts was largely anticipated as groundbreaking activity has been running well ahead of permits approvals over the past several months, especially in the single-family housing segment. The drop left starts just below their second-quarter average.

Economists expect that residential construction will contribute to economic growth in the third quarter after being a small drag on output in the April-June period.

Demand for housing is being driven by a tightening labor market, which is lifting wages. A survey of homebuilders published on Monday showed confidence hitting an 11-month high in September, with builders bullish about current sales now and over the next six months, as well as prospective buyer traffic.

Groundbreaking on single-family homes dropped 6.0 percent to a 722,000-unit pace in August, the lowest level since last October. With permits for the construction of single-family homes rising last month, single-family home building could rebound in the month ahead.

The single-family housing market is being supported by a dearth of previously owned homes available for sale. Single-family home construction tumbled 13.8 percent in the Northeast and dropped 13.1 percent in the South. Starts rose strongly in the West and Midwest.

Housing starts for the volatile multi-family segment fell 5.4 percent to a 420,000-unit pace. The multi-family segment of the market has been buoyed by strong demand for rental accommodation as some Americans shun homeownership in the aftermath of the housing market collapse.

Momentum could slow with rents appearing close to peaking and rental vacancy rates bottoming.