U.S. construction spending inched higher in July but fell short of market expectations, despite a healthy increase in private residential construction outlays, a government report showed on Wednesday.

Construction spending was a seasonally adjusted annual rate of $879.8 billion in July, the Commerce Department (search) said, up 0.2 percent from $877.8 billion in June. Analysts polled by Reuters had expected a 0.5 percent increase. June's rise was revised higher to a 0.7 percent gain.

Private residential construction, the largest spending category, climbed 0.6 percent to a seasonally adjusted $449.6 billion rate in July, the largest increase since a 1.9 percent jump in January. It was the third consecutive monthly increase for that category.

Spending for public construction fell 0.4 percent on drops in highway and school building.

Private residential construction has surged as decades-low interest rates fueled a housing boom, providing one of the few bright spots in a weak economy. However, mortgage interest rates (search) have climbed back up in recent weeks as confidence in the U.S. economic recovery has strengthened.

Rising rates have spurred fence-sitting consumers to jump to take advantage of historically cheap loan levels.

U.S. applications for mortgages to buy homes rose 5.5 percent last week, the first increase since early August, a trade group said Wednesday, as consumers rushed to beat rising mortgage rates.

New home sales dipped in July but still posted the second-highest level on record. Sales of existing U.S. homes rose in the month to a record high in what was probably the peak of the U.S. housing boom, the National Association of Realtors (search) said last week.