U.S. housing starts rebounded more than expected in February, hitting their highest level in five months, as builders ramped up the construction of single-family homes in a sign of confidence in the economy.

Groundbreaking increased 5.2 percent to a seasonally adjusted annual pace of 1.18 million units, the highest level since September, the Commerce Department said on Wednesday. January's starts were revised up to a 1.12 million-unit rate from the previously reported 1.099 million-unit pace.

Economists polled by Reuters had forecast housing starts rising to a 1.15 million-unit pace last month.

The rebound in groundbreaking activity could lift first-quarter gross domestic product growth estimates, which were cut on Tuesday following February's weak retail sales report. The housing sector is being supported by a firming labor market, which is encouraging young adults to leave their parents' homes.

The increase in household formation has largely benefited the multi-family segment of the housing market as many young adults have student debts and little savings to purchase a home.

Labor and land shortages, however, remain a challenge for builders, a survey showed on Tuesday.

Last month, groundbreaking on single-family housing projects, the largest segment of the market, surged 7.2 percent to an 822,000-unit pace, the highest since November 2007.

Single-family starts in the West rose to their highest level since September 2007. In the South, where most home building takes place, single-family starts were unchanged.

Single-family starts soared 18.6 percent in the Midwest. Groundbreaking on single-family housing projects tumbled 12.5 percent in the Northeast, likely as ground remained too wet after a major snowstorm in January.

Housing starts for the volatile multi-family segment rose 0.8 percent to a 356,000-unit pace.

Building permits fell 3.1 percent to a 1.17 million-unit rate last month. Permits for the construction of single-family homes rose 0.4 percent last month, while multi-family building permits dropped 8.4 percent.