By Lucia Mutikani

WASHINGTON (Reuters) -U.S. single-family homebuilding tumbled in October likely as Hurricanes Helene and Milton depressed activity in the South while permits rose slightly, indicating that an anticipated rebound probably would be muted by higher mortgage rates.

The report from the Commerce Department on Tuesday suggested that residential investment, which includes homebuilding, remained subdued at the start of the fourth quarter after contracting in the last two quarters.

The housing market has been battered by higher borrowing costs as the Federal Reserve tightened monetary policy to combat inflation. Economists at Goldman Sachs lowered their gross domestic product estimate for the October-December quarter to a 2.4% annualized rate from a 2.5% pace. The economy grew at a 2.8% rate in the third quarter.

"Despite the weather impact on building down in the South, the recession in residential housing construction remains deep in the woods with no daylight seen for buyers facing supply shortages as they hunt for new single-family homes," said Christopher Rupkey, the chief economist at FWDBONDS.

"The housing shortage and affordability issues will remain unless there is a big jump in new construction."

Single-family housing starts, which account for the bulk of homebuilding, plunged 6.9% to a seasonally adjusted annual rate of 970,000 units last month, the Commerce Department's Census Bureau said. Data for September was revised higher to show homebuilding rising to a rate of 1.042 million units from the previously reported pace of 1.027 million units.

Single-family starts dropped 10.2% in the densely populated South, large parts of which were devastated by Helene in late September. Milton struck Florida in October. Ground-breaking on single-family housing projects plummeted 28.7% in the Northeast, but increased 4.6% in the Midwest and the West.

Single-family homebuilding slipped 0.5% from a year ago.

Starts for multi-family housing jumped 9.8% to a pace of 326,000 units. Overall housing starts dropped 3.1% to a rate of 1.311 million units. Economists polled by Reuters had forecast housing starts would drop to a rate of 1.330 million units. Starts fell 4.0% from a year ago.

New single-family construction has regained ground after taking a beating from a resurgence in mortgage rates during the spring. Momentum, however, has been restricted by new housing supply at levels last seen in 2008, hurricanes in the U.S. Southeast as well as still-elevated borrowing costs.

Though new housing supply has risen, previously owned homes on the market, especially entry-level properties, remain in short supply. Most homeowners have mortgage rates below 4%, reducing the incentive to move.