Housing starts fell 4.8 percent in May to an annual rate of 708,000, but building permits climbed 7.9 percent to the highest level in nearly four years, the U.S. Commerce Department said Tuesday. Economists surveyed by Reuters had forecast a reading of 720,000.

Permits for single-family homes, which account for three-quarters of the housing market, rose 4 percent to an annual rate of 494,000 in May. That's the highest level since March 2010. Meanwhile, building permits for multi-family homes jumped 15.3 percent.

We continue to expect housing activity to increase gradually in the coming months and residential investment to make a positive, albeit small, contribution to GDP growth in H2, Peter Newland, an economist at Barclays Research, wrote in a note.