The Commerce Department said Tuesday that construction of new homes and apartments jumped 17.2 percent last month to a seasonally adjusted annual rate of 532,000 units. That was better than the 500,000-unit pace that economists had expected and came after construction had fallen in April to a record low of 454,000 units.
In another encouraging sign, applications for building permits, seen as a good indicator of future activity, rose by 4 percent in May to an annual rate of 518,000 units.
The better-than-expected rebound in construction was the latest sign that the prolonged slump in housing is coming to an end, which would be good news for the broader economy.
The current recession - the longest since the Great Depression - was triggered by a collapse in the housing market that led to soaring loan losses and a grave crisis for the banking system. A healthy home market is needed to support an economic recovery.
President Barack Obama is scheduled to unveil on Wednesday the administration's plan to overhaul financial regulation in an effort to crack down on the lending abuses that triggered the most severe upheaval in the nation's financial system in seven decades.
Even with the encouraging news, analysts are not looking for a quick rebound in housing, given that the economy is still shedding jobs and home prices are still falling in many years, making people hesitant to commit to buying a new home.
Many economists say home construction likely will stop falling in the current quarter but any sustained rebound isn't expected to take hold until next spring in part because of the huge overhang of unsold homes and a record wave of mortgage foreclosures which is dumping more unsold homes on the market.
With foreclosures and other distressed properties for sale at deep discounts, builders often can't compete. Rather than launching new developments, they are waiting for signs of a broader recovery. Many economists believe that home prices will keep falling until next spring and that sales won't start to show significant gains until the summer of 2010.
The 17.2 percent rise in housing construction for May still left activity 45.2 percent below where it was a year ago.
The May increase reflected a 7.5 percent rise in construction of single-family homes, the third consecutive increase in this critical segment of the market.
Construction of multifamily units was up 61.7 percent in May to an annual rate of 131,000 units. This volatile part of the market had plunged by 49l.4 percent in April.
Construction was up in all parts of the country led by a 28.6 percent surge in the West. Construction rose by 16.8 percent in the South and 11.1 percent in the Midwest. The Northeast had the smallest gain, a rise of 2 percent in May.
The National Association of Home Builders said Monday its housing market index slipped by one point in June, reflecting many builders' uncertainty about when their business prospects might improve. The Washington-based trade association said the index fell to 15. It was the first decline since January, when the index dropped to a record low of 8.
The report is "proof that the rise in U.S. mortgage rates lately is dampening activity," Jennifer Lee, an economist with BMO Capital Markets, wrote in a research note.
Earlier this month, major builders Toll Brothers Inc. and Hovnanian Enterprises Inc. reported smaller quarterly losses, rosier sales trends and more prospective buyers visiting model homes. Industry executives, however, say the recession and fear of job losses are keeping many would-be homebuyers on the fence.