WASHINGTON (Reuters) - U.S. homebuilding fell more than expected in February as construction of single-family homes dropped to near a two-year low, offering more evidence of a sharp slowdown in economic activity early in the year.

A single family home is shown under construction by Toll Brothers Inc, the largest U.S. luxury homebuilder, in Carlsbad, California, United States May 23, 2016. REUTERS/Mike Blake/File Photo

Concerns over the economy were also underscored by other data on Tuesday showing consumer confidence ebbing in March, with households a bit pessimistic about the labor market. The economy is facing rising headwinds, including slowing global growth, fading fiscal stimulus, trade tensions and uncertainty over Britain’s departure from the European Union.

Those concerns contributed to the Federal Reserve’s decision last week to bring its three-year campaign to tighten monetary policy to an abrupt end, as it abandoned projections for any interest rate hikes this year.

“The sugar high is just about over,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. “The risks are more toward the downside than the upside.”

Housing starts decreased 8.7 percent to a seasonally adjusted annual rate of 1.162 million units last month, the Commerce Department said. The percent decline was the largest in eight months, and bad weather could have contributed to the sharp drop in homebuilding last month.

Homebuilding fell in three of the four regions in February. Housing starts data for January and December were revised higher. Building permits fell 1.6 percent to a rate of 1.296 million units in February. While that was the second straight monthly drop in permits, they are now outpacing starts, which suggests a pickup in homebuilding in the months ahead.

Economists polled by Reuters had forecast housing starts falling to a pace of 1.213 million units in February.

The housing market hit a soft patch last year, squeezed by higher mortgage rates, pricier lumber, and land and labor shortages, which led to tight inventories and more expensive homes. But borrowing costs have eased in the wake of the Fed’s signaling of a long pause in hiking rates.

The 30-year fixed mortgage rate dropped to an average of 4.28 percent last week, the lowest in more than a year, from 4.31 in the prior week, according to data from mortgage finance agency Freddie Mac. House price inflation is also slowing.

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A report from S&P/Case-Shiller on Tuesday showed house prices in the 20-metro area increased 3.6 percent from a year ago in January, the smallest gain since September 2012, after rising 4.1 percent in December.

The moderation in mortgage rates and house prices is likely to improve affordability, especially for first-time homebuyers who have been largely priced out of the market. But homebuilders remain constrained in their ability to construct more homes for the lower end of the market.

A survey last week showed confidence among homebuilders was steady in March, with builders still complaining about the scarcity of skilled workers and land, as well as zoning restrictions in many major metro areas.

STORM CLOUDS

“The run-up in interest rates last year did some real damage,” said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. “Even with the recent slide in interest rates, which reflects weakening economic conditions, we do not feel we will see a rebound in housing demand until the storm clouds emanating from slower global economic growth clear later this year.”

The dollar was little changed against a basket of currencies, while U.S. Treasury prices fell. Stocks on Wall Street were trading higher.

Single-family homebuilding, which accounts for the largest share of the housing market, tumbled 17.0 percent to a rate of 805,000 units in February, the lowest level since May 2017. The percentage drop in single-family homebuilding was the largest since February 2015.

Permits to build single-family homes were unchanged in February at a pace of 821,000. Starts for the volatile multi-family housing segment jumped 17.8 percent to a rate of 357,000 units in February. Permits for the construction of multi-family homes fell 4.2 percent to a pace of 475,000 units last month.

The weak housing data strengthens the view that the economy lost considerable momentum early in the first quarter. Retail sales rose moderately in January after tumbling in December, and the manufacturing sector is struggling, with output falling in February for a second straight month.

The Atlanta Fed is forecasting gross domestic product rising at a 1.3 percent annualized rate in the first quarter. The economy grew at a 2.6 percent in the October-December period.

A third report from the Conference Board on Tuesday showed its consumer confidence index fell 7.3 points to a reading of 124.1 in March. While noting that consumer confidence has been volatile in recent months, the Conference Board said “the overall trend in confidence has been softening since last summer, pointing to a moderation in economic growth.”

Consumers’ assessment of both current business and labor market conditions weakened in March. The survey’s so-called labor market differential, derived from data about respondents who think jobs are hard to get and those who think jobs are plentiful, fell to an eight-month low.

It was the second straight monthly decline in this measure, which closely correlates to the unemployment rate in the Labor Department’s employment report. The unemployment rate is at 3.8 percent and job growth decelerated sharply in February.

“It does suggest that we may see the very low jobless rate become a little less low in March,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto. “It all comes down to the job market. It is the single most important factor underpinning confidence and spending.”