NEW YORK (CNNMoney.com) -- In the latest sign of improvement in the housing market, applications for permits to build new homes jumped 7.5% in March, the government said Friday.
The Commerce Department said the number of building permits issued during March, considered a gauge of future construction activity, rose 7.5% to a seasonally adjusted annual rate of 685,000 from February's revised 637,000 rate.
The March tally was the highest since October 2008, when 729,000 permits were issued. Permits were up 34.1% versus March 2009.
Economists surveyed by Briefing.com had expected building permits would fall to 625,000.
The increase is encouraging because most of the homes authorized in March will not be completed in time for borrowers to take advantage of popular home buyer tax credit, said David Crowe, chief economist at the National Association of Home Builders.
"The worry has been that the weakness we saw in construction during the early part of year was a sign that the credit was not having an impact," said Crowe. But the March report "is a solid sign that builders are expecting the market to continue to improve after the credit expires."
The credit, worth up to $8,000, expires later this month and buyers must sign a contract by June to qualify.
Despite the increase in permits, many analysts say the market for new homes faces a slow recovery given the large surplus of foreclosed properties.
"We won't see a vigorous rebound due to the overhang of distressed used homes," said Mike Larson, real estate and interest rate analyst at Weiss Research. "But it will be a gradual recovery nonetheless."
On Thursday, a report from industry group RealtyTrac showed that foreclosure filings rose 7% in the first quarter compared with the previous quarter. Filings were up 16% versus the first quarter of 2009.
Friday's report showed the majority of permits issued in March, 543,000, were for single-family homes. However, analysts said the 142,000 increase in permits for multi-family homes was encouraging.
The South had the largest number of permits issued, at 360,000, while the Northeast, at 66,000, had the fewest.
In addition, the report showed that new home construction rebounded in March after severe snow storms hampered activity in February.
Housing starts rose to an annual rate of 626,000 during the month, up 1.6% from February's revised rate of 616,000. Housing starts were up 20.2% from the 521,000 rate in March 2009.
March housing starts were the highest since November 2008 and were better than forecast. Economists had expected housing starts to increase to an annual rate of 610,000.
The rise in new home construction is partly a reflection of the home buyer tax credit, but questions remain about how sustainable the improvement will be, according to Wells Fargo economist Adam York.
"Builders are rushing to complete and sell homes before it (the tax credit) expires," he said. "Still, starts remain at extremely low levels historically speaking and we expect only modest improvement going forward."
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