U.S. home building and permits for future construction rebounded strongly last month from February's weather-depressed levels, but a glut of housing on the market will make further gains difficult.

Housing starts rose 7.2 percent to an annual rate of 549,000 units from an upwardly revised 512,000-unit pace in February, the Commerce Department said on Tuesday.

The rise marked a bounce back after an 18.5 percent drop in February when severe winter weather restrained activity.

Although the increase beat Wall Street's expectations for a 549,000-unit pace, economists said it did not signal a decisive shift in construction, which continues to be dragged down by stiff competition from a flood of foreclosed properties.

The rebound in housing starts in March does little to hide the fact that home building activity remains close to rock bottom, said Paul Dales, a senior U.S. economist at Capital Economics in Toronto.

With both the demand and need for new homes still very low, housing starts aren't going to enjoy a more meaningful recovery for a few years yet.

Residential construction accounts for about 2.4 percent of gross domestic product, and the latest data suggest it would do little, if anything, to lift the economy in the first quarter. Investment in home building grew at a 3.3 percent annual rate in the last three months of 2010.

Faced with a poor market, builders have shown little appetite to break ground on new projects. An index of builder sentiment in April, released on Monday, slipped a notch with builders viewing sales conditions now and in the next six months as unfavorable.


Housing starts have declined about 76 percent from their 2006 peak of 2.27 million units, but some economists see light at the end of the tunnel.

Even though there remains a huge glut of unsold properties inhibiting construction activity, that glut is diminishing. There is a relative scarcity of new properties, said Richard DeKaser, an economist at Parthenon Group in Boston.

Though used properties ... are super-abundant and are a very effective competitor for new properties ... some people put a premium on new homes and at some point that scarcity is likely to result in improved construction.

According to the National Association of Realtors, new home prices have been running 45 percent higher than prices for existing homes. That premium is historically about 15 percent, and the unusually wide spread indicates previously owned homes are currently selling well below the cost of construction.

U.S. financial markets were little moved by the data as investors focused on other issues ranging from solid earnings from banking giant Goldman Sachs to European debt worries and concern over the United States' credit outlook.

Groundbreaking for single-family homes rose 7.7 percent last month, while construction of multifamily units climbed 5.8 percent.

New building permits advanced 11.2 percent to a 594,000-unit pace last month, rebounding from a record low in February.

The rise in permits reflected a 25.2 percent jump in the multifamily segment to the highest level since January 2009, likely reflecting growing demand for rental properties.

Permits to build single-family homes rose 5.7 percent.

(Editing by Neil Stempleman)