Housing starts fell by much more than expected in the month of March, according to a report released by the Commerce Department on Thursday, with the data likely to offset some of the recent optimism about stabilization in the housing market.

The report showed that housing starts fell 10.8 percent to an annual rate of 510,000 in March from the revised February estimate of 572,000. Economists had expected starts to slip to 540,000 from the 583,000 originally reported for the previous month.

Lindsey Piegza, an economic analyst at FTN Financial said, Builders continue to hold off on initiating new projects until the outstanding inventory glut shows signs of dissipating.

However, after yesterday's large rise in the NAHB Housing Market Index, it appears that some homebuilders may be sprouting at least seeds of optimism, Piegza added.

On Wednesday, the National Association of Home Builders said its housing market index rose to a reading of 14 in April from 9 in March. The gain marked the largest one-month increase since May of 2003 and lifted the index out of single-digit territory for the first time in six months.

The bigger than expected decrease in housing starts was largely due to a pull back in new construction of multi-family homes.

The Commerce Department said that the March rate for units in buildings with five units or more fell 42.6 percent to 116,000 after surging up 69.7 percent in the previous month. The March rate for single-family housing starts was unchanged from February.

Housing starts in the West showed a steep decline, falling by 26.3 percent. Starts in the South also showed a notable 16.8 percent decrease, while housing starts in the Northeast and the Midwest increased by 6.3 percent and 15.9 percent, respectively.

With the monthly decrease, housing starts in the month of March were down 48.4 percent compared to the same month a year ago.

The report also showed that building permits fell 9.0 to an annual rate of 513,000 in March from the revised February rate of 564,000. Economists had been expecting building permits to edge up to 549,000 from the 547,000 originally reported for the previous month.

On a year-over-year basis, building permits, an indicator of future housing demand, were down 45.0 percent compared to March of 2008.

Peter Boockvar, equity strategist at Miller Tabak, said, Housing starts and permits are the one area of the industry where we want to see less activity in terms of the still too high inventory levels.

It will negatively impact the residential construction contribution to GDP but its obviously necessary, Boockvar added.

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