By Sharon Nunn 

U.S. housing starts rebounded last month to the highest level since 2007, driven by a construction rebound in parts of the country that have lagged for much of the economic recovery as well as a lingering apartment boom.

Housing starts rose 5% in May from the prior month to a seasonally adjusted annual rate of 1.35 million, the Commerce Department said Tuesday. Compared with a year earlier, starts were up 20.3%.

The strong improvement was spread fairly evenly between single-family and multifamily, despite expectations that builders would pull back on new apartment construction given a flood of new units already hitting the market. Single-family construction increased 3.9% in May compared with a month earlier, while multifamily building increased 11.3%, according to the Commerce Department.

Midwestern builders also significantly ramped up construction, good news for a region that had lagged compared with the South and the West through much of the economic recovery. Housing starts in the Midwest increased 62.2% in May compared with a month earlier -- albeit with a 28.1 percentage point margin of error.

Wells Fargo & Co. Senior Economist Mark Vitner said part of the bump in the Midwest may be attributable to an improving manufacturing sector. "The economic recovery has broadened and it's reached parts of the country that hadn't seen improvement until recently," he said.

Housing-starts data are volatile from month to month and can be subject to large revisions. May's 5% jump for starts came with a margin of error of 10.2 percentage points.

Building permits, which tend to be a more reliable indicator and signal how much construction is in the pipeline, declined 4.6% to an annual pace of 1.301 million last month. Permit declines in the South and West drove May's permits figure lower. Permits last month fell for both single-family and multifamily housing.

Nonetheless, housing construction appears on track to have a slightly better year than many economists had predicted, thanks in part to surprisingly strong multifamily growth.

Overall starts grew by 11% in the first five months of 2018 compared with the same period a year earlier. Multifamily starts rose 13.3% during that period, while single-family starts rose 9.8%.

Still, builders face headwinds in the coming months. Rising lumber prices have added nearly $9,000 to the cost of a new home since January 2017, according to the National Association of Home Builders, which reported on Monday that builder confidence ticked down slightly in June.

Mr. Vitner said larger home builders have more power to negotiate deals on material and labor prices, but smaller builders are struggling.

"A lot of smaller builders are having to postpone projects...and say let's just sit this out and see if prices come down," he said.

Higher mortgage rates make it more expensive for home buyers, potentially damping demand if the trend continues. "Rising costs for land, labor, and materials are making it difficult to build entry-level and affordable homes...This is on top of prices that are rising due to strong demand and limited availability of homes," said Danielle Hale, chief economist for Realtor.com.

News Corp, owner of The Wall Street Journal and Dow Jones Newswires, also operates Realtor.com under license from the National Association of Realtors.

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Sharon Nunn

contributed to this article.

Write to Sharon Nunn at sharon.nunn@wsj.com

(END) Dow Jones Newswires

June 19, 2018 13:26 ET (17:26 GMT)

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