The pace of U.S. home construction fell 2.1 percent in May to a slightly lower rate than analysts had expected while building permit activity, a signal of future building plans, increased more than anticipated, a government report showed on Tuesday.

The Commerce Department said housing starts set an annual pace of 1.474 million units in May compared with a 1.506 million unit pace in April. Economists had forecast May housing starts to drop sharply to a 1.480 million unit pace from the 1.528 million rate originally reported for April last month.

Building permits, which signal future construction plans, rose in May by 3.0 percent to a pace of 1.501 million units. Economists had been expecting the permits to hit a 1.471 million unit rate. Permits for single-family homes fell 1.8 percent to their lowest level since July 1997 but permits for multi-family units jumped 16.5 percent.

Tuesday's data comes a day after a report indicating that home-builder confidence is at its lowest level in over 16 years.

The National Association of Homebuilders/Wells Fargo Housing Market Index dropped two points to 28 in June. The index of builder sentiment had not dipped that low since it reached 27 in 1991. Readings below 50 indicate more builders view market conditions as poor rather than favorable.

The dollar was little changed while the Treasury market showed little reaction to the data. U.S. stock futures briefly pared losses.

Analysts saw Tuesday's data as suggesting the moribund housing market could be showing faint signs of life.

On balance while the report does not yet make the case we are out of he woods, it does suggest that the inventory drawdown is running its course and points to stabilization in housing, said Alex Beuzelin, senior market analyst with Ruesch International in Washington.

Many economists have extended their timeline for a housing market recovery in light of growing foreclosures among borrowers with damaged credit and climbing mortgage rates.

Mortgage rates have risen sharply in recent weeks along with yields on the benchmark 10-year Treasury note. The benchmark 10-year note reached a five-year high of 5.33 percent last week.

The once-thriving West Coast has felt some of the worst of the housing market downturn. Housing starts there were off 38 percent in May from a year ago -- the largest year-on-year drop since a 49 percent decline in March 1991.