Groundbreaking for homes scaled a six-month high in June, partly reflecting growing demand for rental apartments, a government report showed on Tuesday.

The Commerce Department said housing starts increased 14.6 percent to a seasonally adjusted annual rate of 629,000 units, the highest level since January, as ground breaking for multi-family units soared 30.4 percent.

Confronted with plummeting home values, Americans are shunning homeownership, pushing up demand for rentals and helping construction to stabilize.

The report also showed an unexpected increase in building permits and a sturdy gain in the construction of single-family homes. It offered a glimmer of hope for the distressed housing sector, which is struggling under the weight of a glut of for-sale properties and plummeting prices.

There is a recovery unfolding, it's just glacially slow and requires incredible scrutiny to discern it, said Richard DeKaser, an economist at Parthenon Group in Boston. New homes are more scarce than they have ever been.

Economists had expected housing starts to rise to a 575,000-unit rate last month. Compared to June last year, residential construction was up 16.7 percent.

Recent data have suggested the economy may struggle a bit to break free of the soft patch it has been trapped in since the beginning of the year.

While home building is still expected to be a drag on second-quarter growth, analysts said it could add to growth in the third quarter, although it now represents only about 2.4 percent of U.S. gross domestic product.

The report helped push up U.S. stock prices, which also received support from strong earnings from IBM and Coca-Cola. Home-builder stocks outpaced the overall market.

However, corporate reports showed the economy was still facing strains. Goldman Sachs Group badly missed earnings expectations, Cisco Systems said it would cut its workforce by 15 percent, and bookseller Borders Group said it would shutdown, resulting in a loss of nearly 11,000 jobs.

Prices for U.S. government debt fell marginally, while the dollar weakened against a basket of currencies.

HOME CONSTRUCTION STILL WEAK

With rentals rising, U.S. homeownership rate was at 66.5 percent in the first quarter, down from a high of 69.4 percent in the second quarter of 2004.

The shape of the housing recovery is starting to form. It will be one in which the multi-family market recovers before the single-family home market does, said Patrick Newport, a U.S. economist at IHS Global Insight in Lexington, Massachusetts.

A survey on Monday showed sentiment among home builders edged up in July from a nine-month low in June, but they saw no increase in prospective buyers.

An overhang of previously owned homes on the market has left builders with little appetite to break ground on new projects and is frustrating the housing sector's recovery two years after the end of the 2007-09 recession.

The level of housing starts in June was less than a third of the peak reached during the housing boom.

Previously owned homes are currently selling well below the cost of new construction as a deluge of foreclosed properties continues to depress prices, dampening demand for new homes.

Data on Wednesday is expected to show that existing home sales rose 2.9 percent to a 4.90 million unit pace in June, according to a Reuters survey.

Despite the competition from a surplus of previously owned homes on the market, new building permits rose 2.5 percent to a 624,000-unit pace last month. Economists had expected overall building permits in June to edge down to a 600,000-unit pace.

Permits were boosted by a 6.9 percent rise in the multi-family segment. Permits for the construction of buildings with five units and more increased 8.2 percent to their highest level since October 2008.

Permits to build single-family homes edged up just 0.2 percent.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

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