WASHINGTON (Reuters) - U.S. construction spending increased more than expected in December amid a surge in single-family homebuilding, and further gains are likely as mortgage rates decline.

The Commerce Department said on Thursday that construction spending rose 0.9%. Data for November was revised higher to show construction spending advancing 0.9% instead of 0.4% as previously reported. Economists polled by Reuters had forecast construction spending gaining 0.5%.

Construction spending shot up 13.9% on a year-on-year basis in December. It increased 7.0% for all of 2023. Spending on private construction projects increased 0.7% in December after rising 1.1% in November. Investment in residential construction soared 1.4% after advancing 1.0% in the prior month.

Outlays on new single-family construction projects jumped 1.6%. Demand for new construction is being driven by a perennial shortage of previously owned homes on the market.

Single-family home building is likely to rise further this year amid lower borrowing costs.

The Federal Reserve left interest rates unchanged on Wednesday. Fed Chair Jerome Powell offered a sweeping endorsement of the economy's strength, telling reporters that interest rates had peaked and would move lower in coming months.

The U.S. central bank has raised its policy rate by 525 basis points since March 2022 to the current 5.25%-5.50% range.

The rate on the popular 30-year fixed-rate mortgage has tumbled from a 23-year high of 7.79% in late October and is hovering in the mid-6% range, according to data from mortgage finance agency Freddie Mac.

Outlays on multi-family housing projects gained 0.3% in December. With the rental vacancy rate near three-year highs and a large stock of multi-family housing in the pipeline, scope for growth this year is limited.

Outlays on private non-residential structures like factories fell 0.2%. Spending on manufacturing construction projects dipped 0.1% as the boost from a policy by the Biden administration to bring semiconductor manufacturing back to the United States fades.

Spending on public construction projects increased 1.3% after gaining 0.5% in November.

State and local government spending rose 0.9% while outlays on federal government projects surged 6.4%.