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Updated from 10:55 a.m.

New housing starts came in higher than expected in May but still were lower than last year's levels.

Total housing starts in May were at a seasonally adjusted annual rate of 1.96 million, which is 5% above the revised April estimate of 1.86 million but 3.8% below the May 2005 total of 2.03 million, the Commerce Department said. Economists were expecting a rate of 1.87 million starts last month.

Single-family starts in May were at a rate of 1.59 million, 2.1% above the April figure.

"This is a good number," says Phillip Neuhart, an economic analyst with Wachovia. "It's a year-over-year decline, but not a huge drop."

The data show that the housing market is moderating rather than collapsing, he says. "That's the sort of number we want to see going forward."

Building permits for privately owned housing units in May were at a seasonally adjusted annual rate of 1.93 million, which was 2.1% below the revised April rate and 8.5% below the year-earlier total.

Single-family authorizations in May were at a rate of 1.47 million, also 2.1% below the April figure.

"The fact that we're seeing some real weakness of four months straight of declines in housing permits will eventually feed into slower starts in the future," says Neuhart.

Tony Crescenzi, chief bond market strategist at Miller Tabak and a

contributor, took a more bearish tone on the data.

"While the data might appear like good news, the increase in starts occurring in the midst of a decrease in sales, boosting inventories, is definitely a negative," he wrote. "The inventory-to-sales ratio for new homes is near a 10-year high, which means that the new homes built are going unsold. This could put downward pressure on prices until inventories clear."

"The only positive in the housing starts report is that it will limit the degree of negative contribution that is made from the housing market," Crescenzi notes.

Homebuilder stocks were lower in late-afternoon trading.

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