By Lucia Mutikani
WASHINGTON (Reuters) - U.S. housing starts increased more than expected in April and activity in the prior month was stronger than initially thought, suggesting declining mortgage rates were providing some support to the struggling housing market.
Land and labor shortages, however, continue to constrain builders' ability to construct more lower-priced houses, the segment of the market that has suffered an acute shortage of inventory and weak sales. Those supply challenges were highlighted by a drop in the number of homes under construction to a seven-month low in April.
"The housing market is coming back a little," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "Building activity is what really matters for economic growth and right now, that is softening."
Housing starts rose 5.7% to a seasonally adjusted annual rate of 1.235 million units last month, driven by gains in the construction of both single- and multi-family housing units, the Commerce Department said on Thursday. Groundbreaking was also likely boosted by drier weather in the Midwest.
Data for March was revised up to show homebuilding rising to a pace of 1.168 million units, instead of falling to a rate of 1.139 million units as previously reported.
Building permits rose 0.6% to a rate of 1.296 million units in April, after three straight monthly declines. Single-family building permits, however, fell for the fifth straight month, suggesting a moderation in groundbreaking activity was likely.
Economists polled by Reuters had forecast housing starts would increase to a pace of 1.205 million units in April.
The 30-year fixed mortgage rate has dropped to 4.10% from a peak of about 4.94% in November, according to data from mortgage finance agency Freddie Mac. Decreasing mortgage rates reflect a recent decision by the Federal Reserve to suspend its three-year monetary policy tightening campaign.
A survey on Wednesday showed confidence among homebuilders rose to a seven-month high in May. While lower borrowing costs are boosting demand, builders said they "continue to deal with ongoing labor and lot shortages and rising material costs that are holding back supply and harming affordability."
Relatively cheaper home loans and a strengthening labor market, characterized by the lowest unemployment rate in nearly 50 years, are underpinning demand for housing. In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits dropped 16,000 to a seasonally adjusted 212,000 for the week ended May 11.
The PHLX housing index was trading higher, also tracking a broadly firmer U.S. stock market. The dollar rose against a basket of currencies, while U.S. Treasury prices fell.
The robust job market should also support the economy as the boost from the White House's $1.5 trillion tax cut package fades and President Donald Trump's escalating trade war with China disrupts supply chains at factories, which are already struggling with an inventory bloat that has cut production.
A third report from the Philadelphia Federal Reserve on Thursday showed manufacturing activity in the mid-Atlantic region accelerated in May, but factories reported receiving fewer orders and were less upbeat about capital spending over the next six months.
The survey was conducted before last Friday's move by Trump to hike tariffs on $200 billion worth of Chinese goods.
"While business sentiment appears to have picked up lately, it is unclear what types of assumptions respondents had about trade policy, and many of the responses for these surveys likely were completed before the increase in tariffs implemented last Friday," said Daniel Silver, an economist at JPMorgan in New York.
The housing market has been mired in a soft patch since last year. Investment in homebuilding contracted at a 2.8% annualized rate in the first quarter, the fifth straight quarterly decline.
Last month, single-family homebuilding, which accounts for the largest share of the housing market, increased 6.2% to a rate of 854,000 units. Single-family homebuilding surged in the Midwest, which had suffered flooding in prior months. Single-family starts also rose in the Northeast and West, but fell in the South, where the bulk of homebuilding occurs.
Permits to build single-family homes dropped 4.2% to a rate of 782,000 units in April. The number of houses under construction fell last month as did competitions.
Starts for the volatile multi-family housing segment advanced 4.7% to a rate of 381,000 units last month. Permits for the construction of multi-family homes rebounded 8.9% to a pace of 514,000 units last month.
"It looks like residential construction will move sideways in coming months, with a slight increase in multifamily construction edging out a decrease in single-family starts," said Andres Carbacho-Burgos, a senior economist at Moody's Analytics in West Chester, Pennsylvania.
(Reporting by Lucia Mutikani; Editing by Paul Simao and Andrea Ricci)