U.S. housing starts keep recovery hopes alive

By Lucia Mutikani

WASHINGTON (Reuters) - Ground-breaking for new U.S. single-family homes rose for a fifth straight month in July and producer prices tumbled, keeping hopes for an economic recovery alive.

The Commerce Department said on Tuesday construction starts for single-family dwellings, the worst-hit part of the housing market, rose 1.7 percent from June to an annual rate of 490,000 units -- the highest since October.

But a 13.3 percent drop in new multifamily home projects pushed overall housing starts down 1 percent last month to an annual rate of 581,000 units after two months of gains.

"The economy is recovering, this is the turning corner. We will have positive growth this quarter, but not a lot of strength. It very much looks like a U-shaped recovery rather than V-shaped," said Kurt Karl, head of economic research at Swiss Re in New York.

Stocks on Wall Street ended higher, also boosted by better-than-expected results from retailers Home Depot Inc and Target Corp, which were largely due to cost cutting and a tight control on inventory.

The Dow Jones industrial average gained 0.9 percent to end at 9,217 while the Standard & Poor's 500 index rose 1 percent to 989. Government bond prices fell, losing some of their safe-haven appeal.

Mohamed El-Erian, chief executive of bond fund manager Pacific Investment Management Co, cautioned the rally in U.S. stock markets had topped out as valuations were running ahead of fundamentals.

While data has pointed to the likely end of the recession that started in December 2007, analysts are wary of a weak recovery as rising unemployment crimps consumer spending.

But there have been some encouraging signs in the labor market, where layoffs are slowing. General Motors said on Tuesday it was increasing production in North America and reinstating 1,350 jobs.

The housing market, the main culprit behind the worst U.S. economic downturn in 70 years, is being closely watched for signs of recovery after a three-year slump.

A survey on Monday showed confidence among home builders rose in August to its highest in over a year.

Home Depot chief financial officer Carol Tome told Reuters in an interview that it was "reasonable" to believe the U.S. housing contraction was over.

HOUSING RECESSION ENDING

Harm Bandholz, an economist at UniCredit Markets and Investment Banking in New York, agreed the housing recession was drawing to a close. He said weakness in multifamily construction reflected "financing problems in the commercial real estate sector and stubbornly high vacancy rates."

Compared to July last year, housing starts were down 37.7 percent, a reminder of how sharply the market had contracted.