The overall pace of homes started rose 7 per cent from February to March to a seasonally adjusted annual rate of 1.04 million, the Commerce Department said Tuesday.
Apartment construction, which tends to fluctuate sharply from month to month, led the surge: It jumped nearly 31 per cent to an annual rate of 417,000, the fastest pace since January 2006.
By contrast, single-family home building, which makes up nearly two-thirds of the market, fell 4.8 per cent to an annual rate of 619,000. That was down from February's pace of 650,000, the fastest since May 2008. The government said February's pace was a sharp 5.2 per cent higher than it had previously estimated.
Applications for building permits, a gauge of future construction, declined 3.9 per cent to an annual rate of 902,000. It was down from February's rate of 939,000, which was also nearly a five-year high.
Scott Laurie, president of Olson Homes, said that last month's falloff in single-family starts is not representative of what's happening in the market.
A scarcity in ready-to-build land has many builders working to get local governments to approve new land for construction, he said. The process can take 12 to 18 months. A survey of homebuilders released Monday noted similar concerns.
"You'll see starts will continue to increase as the year goes on and new projects start to open up," Laurie said.
Laurie's company builds homes in Southern California priced roughly from $325,000 to $750,000. He says Olson's construction starts are on pace to climb at least 40 per cent this year, as the builder moves to add as many as eight new communities.
"The market started showing improvement in the early part of 2012 and really hasn't slowed down since," said Laurie. "Right now, were very bullish."
The jump in home building is expected to contribute to economic growth in 2013 for a second straight year — a reversal from 2006 through 2011, when it held back the economy.
Deutsche Bank predicts that home construction will reach an annual pace of 1.2 million by year's end. Brett Ryan, an economist at Deutsche Bank, said that rate could add 0.5 percentage point to 2013 growth. That would be the biggest contribution from housing since 2004.
The housing recovery could spur an additional percentage point of growth by encouraging more consumer spending, Ryan said. More building and higher home sales mean Americans will likely spend more on things like furniture and landscaping. Higher home prices also create a "wealth effect" that gives homeowners the confidence to spend more.
Steady job growth, near record-low mortgage rates and rising home values have encouraged more people to buy homes. In response to higher demand and a low supply of available homes for sale, builders have stepped up construction.
March's pace of homes started was nearly 46 per cent higher than in the same month in 2012.
Housing construction fell 5.8 per cent in the Northeast but gained in the rest of the country, led by a 10.9 per cent rise in the South. It rose 9.6 per cent in the Midwest and 2.7 per cent in the West.
The National Association of Home Builders/Wells Fargo April survey released Monday showed that builders are concerned that limited land and rising costs for building materials and labour could slow sales in the short term. That led to a third straight monthly drop in confidence.
Still, the builders' outlook for sales over the next six months climbed to the highest level in more than six years, suggesting that the obstacles could be temporary.
And construction firms have stepped up hiring in recent months. They added 18,000 jobs in March and 169,000 since September, according to the Labor Department.
Though new homes represent only a fraction of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to statistics from the homebuilders.
AP Economics Writer Christopher S. Rugaber contributed to this report.