Groundbreaking on new U.S. home construction fell more than expected in December to its lowest in over a year, suggesting the battered housing sector remains a major roadblock to economic recovery.

U.S. housing starts dropped to an annual rate of 529,000 units, the Commerce Department said on Wednesday, down from November's 553,000 and well below forecasts around 550,000 in a Reuters poll. At current levels, starts account for less than a quarter of their boom-time peaks.

At the same time, building permits soared, a hint of optimism about future demand. Permits jumped 16.7 percent to 635,000, far above a median forecast of 560,000 and the biggest jump since June 2008.

However, changes to state building codes set to take effect in January may have boosted permits in California, Pennsylvania and New York in December, the report said. For example, permits surged 80.6 percent in the Northeast last month.

Financial markets had a muted reaction to the figures, though gold prices did hit a session high following their release.

Jennifer Lee, senior economist at BMO Capital Markets in Toronto, called the housing report very disappointing.

Some builders went ahead in December with projects to beat the change (in building codes), so that is reflected in the headline, she said. Look for a big retracement in January permits, which in turn, is not good news for starts.

Housing was at the epicenter of the worst financial crisis in generations, which began when banks started to take a hit from rising defaults in the mortgage sector in the summer of 2007. Real estate continues to be plagued by foreclosures, which topped 1 million for the first time ever during 2010.

Nevada, Arizona and Florida are among the hardest hit states.

You still have this nagging worry that if housing remains in this kind of uncomfortable equilibrium, it could drag down the consumer and the economy, said Cary Leahey, economist at Decision Economics in New York.

What little rebound has occurred in housing thus far has been erratic. Applications for U.S. home mortgages increased last week as interest rates dipped to their lowest in a month, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity rose 5 percent in the week ended January 14.

The MBA's seasonally adjusted index of refinancing applications gained 7.7 percent last week, and the gauge of loan requests for home purchases fell 1.9 percent.

Fixed 30-year mortgage rates averaged 4.77 percent in the week, down 1 basis point from 4.78 percent the prior week. The rate is down from 4.93 percent at the end of December.

(Additional reporting by Al Yoon and Ellen Freilich in New York; Editing by Andrea Ricci)

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