U.S. construction spending declined further in July as rising mortgage rates weighed on single-family homebuilding, offsetting a rebound in outlays on public projects.

The Commerce Department said on Thursday that construction spending fell 0.4% in July after decreasing 0.5% in June. July's decline was in line with economists' expectations. Construction spending increased 8.5% on a year-on-year basis in July.

Spending on private construction projects dropped 0.8% after decreasing 0.7% in June. Investment in residential construction tumbled 1.5%, with spending on single-family projects plunging 4.0%. Outlays on multi-family housing projects slipped 0.6%.

Rising mortgage rates have combined with higher home prices to reduce affordability, especially for first-time buyers, putting a damper on the housing market.

Residential spending contracted at its steepest pace in two years in the second quarter. That contributed to gross domestic product declining at an annualized rate of 0.6% last quarter after shrinking at a 1.6% pace in the January-March quarter. The Federal Reserve has hiked its policy rate by 225 basis points since March.

Investment in private non-residential structures like gas and oil well drilling gained 0.4% in July. Outlays on non-residential structures have declined for five straight quarters.

Spending on public construction projects surged 1.5% after edging up 0.1% in June. Investment in state and local government construction projects jumped 1.6%, while federal government gained 0.1%.