Homes picture mixed after starts data

By Patrick Rucker

WASHINGTON (Reuters) - The pace of U.S. home construction rose a sharp 9 percent in February but permits for future building slid, according to data on Tuesday that shed little light on whether the housing market was stabilizing.

The cloudy home construction data and recent woes in the subprime mortgage market are sure to be on the minds of Federal Reserve members as they weigh monetary policy when they meet Tuesday and Wednesday.

The unexpectedly large boost in home construction reversed a sharp decline a month earlier -- a swing that some attributed to an unusually warm December and cold January.

"It's a surprise that the (cold) weather didn't kill off starts," said Kurt Karl, chief economist at Swiss RE in New York.

While the national home starts figure was up, he said, the picture was mixed across the country.

"The gains in the South and West made up for the drops in the Northeast and Midwest," said Karl.

U.S. Treasuries initially fell on the starts data but weaker permits and a downward revision in January's report pushed prices up. U.S. stocks were little changed on Tuesday ahead of the Fed meeting.

Analysts said the mixed housing data was likely to firm the Fed's resolve to hold interest rates in place.

"I don't think it changes things for the Fed at all, they are most likely going to leave rates unchanged and to maintain their bias toward tightening," said Mark Vitner, senior economist at Wachovia Securities in Charlotte, North Carolina.

The Commerce Department said housing starts set an annual pace of 1.525 million units in February compared with a 1.399 million unit pace in January. That was the sharpest month-over-month increase since a 13.1 percent rise in January 2006.

Economists had forecast February housing starts to rise to a 1.45 million unit pace from January's originally reported pace of 1.408 million units.

Building permits, which signal future construction plans, fell 2.5 percent to a 1.532 million unit pace. Economists were expecting building permits to register a 1.55 million unit pace, down from 1.571 million in January.

TOO SOON TO SAY

Tuesday's starts data bucked recent weakness in the subprime finance sector for riskier borrowers that has had many forecasters revising their predictions for a housing sector recovery this year. News of growing mortgage delinquencies, particularly in the subprime sector, shook financial markets early this month.

While Tuesday's data was brighter-than-expected, analysts were looking ahead to a report later this week to see if homes for sale were attracting buyers.