Builders in April broke ground on more homes than projected as buyers took advantage of a tax credit before its expiration.

Housing starts rose to a 672,000 annual rate last month, the highest since October 2008 and up 5.8% from March, Commerce Department figures showed Tuesday. Building permits, a sign of future construction, dropped to the lowest level in six months.

Demand that was bolstered by a government incentive of as much as $8,000 helped reduce the number of unsold new houses to the lowest level since 1971 and encouraged builders to take on more projects. The slump in permits indicates that sustained gains in the weakest part of the economy will require job creation and fewer foreclosures that have pushed down prices.

"We think the pace of the housing recovery will be modest at best," said Jonathan Basile, a Credit Suisse economist in New York, who forecast April starts at a 670,000 pace. "It's encouraging to see starts gain some traction, but the decline in permits takes some of the luster off."

Building permits fell 12%, to a 606,000 annual rate, in April. Housing starts were revised up in March to a 635,000 annual pace.

Starts were forecast to rise to a 650,000 annual rate, according to the median projection of 77 economists surveyed by Bloomberg News. Estimates ranged from 620,000 to 700,000. Tuesday's report included annual revisions from the Commerce Department.

Permits were projected to hold at a 680,000 annual rate, matching the pace in March that was the highest since October 2008, according to the survey median.

Starts rose 41% in April compared with April 2009, the biggest year-over-year gain since 1994. Permits rose 16%.

Construction of single-family houses increased 10%, to a 593,000 rate in April, while permits fell 11%. Work on multifamily homes, such as townhouses and apartment buildings, dropped 19%, to an annual rate of 79,000.

Three of four regions had an increase in starts last month. The gain was led by a 24% jump in the Northeast. Starts rose in the South and Midwest and fell in the West.

The tax credit for first-time homebuyers, which was extended in November to include some current owners, required that contracts be signed by April 30 and settled by June 30. Sales of new homes surged in March by the most since 1963, while purchases of existing homes rose for the first time in four months.

The jump in sales brought the number of new houses for sale down to 228,000, the lowest since March 1971, allowing builders more room to begin projects even as they compete with foreclosed homes coming back on the market.

Home repossessions rose to a record level in April while foreclosure filings dropped, signaling that mortgage lenders are working off a backlog of seized properties, according to data that RealtyTrac Inc. released last week.

Home builders turned less pessimistic in May, a report issued Monday concluded. The National Association of Home Builders/Wells Fargo confidence index rose to the highest level since August 2007.

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