By Lucia Mutikani

WASHINGTON (Reuters) - U.S. housing starts slipped in May as the construction of multi-family housing units dropped, but further gains in building permits signaled a rebound that would support economic growth in the second quarter.

Groundbreaking fell 0.3 percent to a seasonally adjusted annual pace of 1.16 million units, the Commerce Department said on Friday. May's decline followed a 4.9 percent surge in April. Building permits rose 0.7 percent to a 1.14-million unit rate in May.

"Another month of gains in building permits coupled with near record low mortgage rates provide opportunity for a bounce back," said Bill Banfield, vice president at Quicken Loans in Detroit.

Though the pace of home building has slowed after a brisk first quarter, housing remains a pillar of strength for the economy. Residential construction added almost six-tenths of a percentage point to first-quarter gross domestic product, the biggest contribution in more than three years.

The economy grew at a 0.8 percent annualized rate in the first quarter. The Atlanta Federal Reserve left its growth forecast for the second quarter unchanged at a 2.8 percent pace after Friday's housing starts data.

Economists polled by Reuters had forecast housing starts falling to a 1.15 million-unit pace last month.

The S&P homebuilding index <.SPLRCHOME> rose 1.21 percent, outperforming a broadly weaker U.S. stock market. Shares in the nation's largest homebuilder, D.R. Horton Inc <DHI.N>, advanced 1.31 percent and Lennar Corp <LEN.N> gained 1.0 percent. Luxury homebuilder Toll Brothers rallied 1.82 percent.

Prices for U.S. government debt fell and the dollar <.DXY> was trading lower against a basket of currencies.


Groundbreaking on single-family homes, the largest segment of the market, rose 0.3 percent to a 764,000-unit pace last month. Single-family starts in the American South, where most of the home building takes place, rose 2.6 percent to their highest level since December 2007.

Single-family starts in the Northeast region surged 12.7 percent. In the West, groundbreaking on single-family housing projects rose 1.9 percent. But single-family starts in the Midwest tumbled 14.7 percent to a six-month low.

Further gains in single-family starts are likely after a survey on Thursday showed confidence among home builders rose to a five-month high in June amid optimism over sales and buyer traffic. But single-family home construction continues to run ahead of permits, which could limit the rise in the short term.

Housing starts for the volatile multi-family segment fell 1.2 percent to a 400,000-unit pace last month, following an 11.9 percent jump in April. The multi-family segment of the market continues to be supported by strong demand for rental accommodation as some Americans remain wary of owning homes years after the housing market collapse.

Multi-family home construction is also being aided by rising household formation as a fairly strong labor market increases employment opportunities for young adults.

"There is some evidence of a pullback in multi-family activity from very elevated levels seen in the summer of last year, but the strength of the rents data in the inflation report suggests that this is not a product of overbuilding," said John Ryding, chief economist at RDQ Economics in New York.

The government reported on Thursday that rents in May posted their biggest gain since February 2007. 

Permits for the construction of single-family homes fell 2.0 percent last month to a 726,000-unit rate. But single-family permits in the South rose 0.8 percent to a five-month high. Multi-family building permits increased 5.9 percent to a 412,000-unit pace in May.

"We think the signals from the recent permits data, which are forward looking, are more indicative of the underlying trends. We look for continued improvement related to single-family units over time but some cooling in the multifamily data," said Daniel Silver, an economist at JPMorgan in New York.

(Reporting by Lucia Mutikani; Editing by Paul Simao)