Housing construction 'encouraging'

NEW YORK (CNNMoney) -- In an encouraging sign for the housing market, new home construction increased more than expected in March, according to a government report Tuesday.

But economists cautioned that the report's impact doesn't mean the market has turned around just yet.

Housing starts, the number of new homes being built, rose 7.2% in March to an annual rate of 549,000 units, up from a revised 512,000 in February, the Commerce Department said.

Economists had expected an annual rate 520,000 units, according to consensus estimates from Breifing.com.

The report also said there were 594,000 building permits issued in March. That's up 11% from 534,000 permits in February, and was also better than expected.

Building permits were forecast to have increased to an annual rate of 540,000 units.

"Despite continued volatility, today's numbers show welcome growth within the housing market," Commerce Secretary Gary Locke said in a statement.

Locke pointed to improved job growth in March, suggesting that Americans may start feeling confident enough to wade back into the housing market later this year.

"There are positive signs for widespread growth throughout the economy and a stronger housing market in the coming year," he said.

While housing starts and building permits increased in March from the month before, both were about 13% below levels seen in March 2010.

In addition, new construction of multifamily homes continues to outpace construction of single-family units, which are considered the core of the residential housing market.

Single-family housing starts increased 7.7% in March, while construction of buildings with five units or more was up 14.7% versus February.

Mark Vitner, senior economist at Wells Fargo Securities, said the increase in March was "encouraging." But he attributed the rise in construction of single-family homes to a rebound from February, when construction stalled because of bad weather.

"Single-family starts remain at extremely depressed levels, and any recovery will be long and arduous due to the oversupply of existing homes on the market and the increasing amount of distressed transactions," he said.

Vitner added that foreclosed homes and short sales -- when a bank agrees to let a house be sold for less than its outstanding mortgage -- made up an estimated 39% of all closings in February, which suggests that home prices will remain under pressure.

The poor outlook for home prices "gives builders little incentive to ramp up building activity," he said.

Patrick Newport, an economist at IHS Global Insight, said he expects the housing market will start to regain momentum this year as the job market gradually improves.

But challenges remain, he said. In addition to the glut of foreclosed homes, Newport said the housing market is being held back by tight credit.

"If builders cannot get financing to build new homes, housing will remain in the dumps," he said.