US housing starts fell in May from a three-and-a-half-year high, although permits to build new homes rose sharply, suggesting a nascent recovery remains on track.

The Commerce Department yesterday said groundbreaking on new homes dropped last month to an annual rate of 708,000 units.

However, upward revisions to data for March and April put starts above 700,000 for five straight months, a first since 2008.

This highlights a big turn of events underway. While the economy appears to be losing steam, housing is gaining traction and has become a relative bright spot.

Despite a slowdown in hiring, home prices appear to be stabilising and builder sentiment has risen to a five-year high.

"The recovery in housing market activity seems not to have been affected by the recent softening in much of the other economic data," said Ian Shepherdson, economist at High Frequency Economics in Valhalla, New York.

The May decline in starts was due to a 21.3 per cent drop in groundbreaking for multi-family buildings. Starts for single-family homes increased 3.2 per cent. New building permits jumped 7.9 per cent to a 780,000-unit pace.-Reuters