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. But May's starts were revised down to a 549,000 unit pace, which was previously reported as a 560,000 unit rate.
Economists polled by Reuters had forecast housing starts rising to a 575,000-unit rate. Compared to June last year, residential construction was up 16.7 percent.
US stock index futures extended gains after the housing data, while government debt prices extended losses. The dollar pared losses against the yen.
Despite the June increase, the housing starts rate remains less than a third of the peak it reached during the housing boom.
"In the grand scheme of things, it's nice to see it jump higher, but it doesn't take us out of the range we've been in," said David Mann, senior currency strategist, Standard Chartered in New York. "So there's still an extremely long way to go before we can be sure there's a serious recovery underway."
Residential construction accounts for about 2.4 percent of gross domestic product and indications are that it remained a drag in the second quarter after shrinking at a 2.0 percent annual rate in the first three months of 2011.
The government will release its first estimate for second-quarter gross domestic product on July 29.
Growth estimates for the April-June quarter currently range between 1 percent and 2.3 percent. The economy grew at a 1.9 percent pace in the first three months of the year.
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.
Previously owned homes are currently selling well below their cost of construction as a deluge of foreclosed properties continues to depress prices.
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, but not enough to whittle down bloated inventory.
Confronted with plummeting home values, Americans are shunning home ownership, pushing up demand for rentals. That has resulted in a rise in groundbreaking for multi-family homes in recent months and is helping construction to stabilize.
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.
Last month, housing starts for multi-family homes soared 30.4 percent to a 176,000-unit rate, while single-family home construction — which accounts for the largest portion of the market — increased 9.4 percent to a 453,000-unit pace.
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 0.2 percent.
New home completions fell 1.7 percent to 535,000 units in June.
