US construction firms started more new home projects in May, the government said Wednesday, but the progress was weaker than expected amid a scarcity of real estate and materials that has driven prices higher.

Housing starts rose 3.6 percent last month from April to a seasonally-adjusted annual rate of nearly 1.6 million, the Commerce Department report showed.

New construction started on single family homes rose 4.2 percent from April to a seasonally adjusted rate of almost 1.1 million annualized.

"Strong demand, a need for inventory and homebuilder optimism will keep a floor under activity, but builders continue to face supply constraints that may hamper or at least postpone construction," Nancy Vanden Houten of Oxford Economics said.

Growth was strongest in the Midwest, where starts surged 29.9 percent, while the South and West saw more modest growth of 3.8 percent and one percent, respectively. However starts in the Northeast plunged 22.4 percent.

Permits issues, a more volatile indicator of housing in the pipeline, rose three percent from April figure to nearly 1.7 million, but this was also less than expected. Single family home permits fell 1.6 percent to a rate of over 1.1 million.

And housing starts and permits registered in April were revised lower than originally reported, the report showed.

The shortage of US real estate is seen as supporting homebuilding, though the housing boom may have passed its peak
The shortage of US real estate is seen as supporting homebuilding, though the housing boom may have passed its peak AFP / Chris DELMAS

The housing market boomed in 2020 despite the wider economic malaise caused by the Covid-19 pandemic, as buyers took advantage of low mortgage rates to buy property.

However, that trend has drained supply and sent prices higher, leaving firms scrambling to build to keep up with demand.

A separate report from the Mortgage Bankers Association showed home-loan applications increased 4.2 percent last week, after three weeks of declines, despite the supply constraints.

But Ian Shepherdson of Pantheon Macroeconomics said the data reinforces his belief that last year's housing boom has petered out.

"We think construction has some way further to fall, though the shortage of inventory means that activity will remain higher than implied by the mortgage applications data for some time yet," he said in a note.

Nonetheless, the report said housing starts last month were 50.3 percent higher than in May 2020.