Builders broke ground on more new homes in May, but not enough to signal a recovery in the troubled housing market.

New-home construction rose 3.5 percent from April to a seasonally adjusted annual rate of 560,000 units per year, the Commerce Department said Thursday.

Economists say the pace of construction is far below the 1.2 million new homes per year that must be built to sustain a healthy housing market. Many credit-strapped builders are struggling to compete with low-priced foreclosures.

Housing permits, a gauge of future construction, rose 8.7 percent last month, to the highest level since December. But apartment and condominium construction accounted for a large portion of that increase. Permits for buildings with five or more housing units jumped to its highest point since October 2008, well before a second wave of foreclosures knocked home prices down further.

The number of single-family homes started in May rose a modest 3.7 percent. It's at its highest point since January. But the construction pace of single-family homes, which accounts for about 80 percent of all residential construction, is well below the 2010 rate. The last two years were the worst for housing starts on records going back to 1959.

Fewer new homes mean fewer jobs. Each home built creates an average of three jobs for a year and generates about $90,000 in taxes, according to the National Association of Home Builders.

Builders are struggling to compete with millions of foreclosures that are forcing down prices for re-sold homes. The median price of a new home is about 34 percent higher than the median price for a re-sale. That's more than twice the markup in healthy housing markets.

"The high premium is expected to continue to sway potential buyers to existing homes and away from new ones," said Christos Shiamptanis, economist at TD Economics.

In some cities, prices are half of what they were before the housing market collapsed in 2006 and 2007. Tougher lending standards have made home loans hard to come by. Many would-be buyers who could qualify for loans are worried prices will fall further. Others are reluctant to put their own homes up for sale when prices are dropping.

Home prices in big metro areas have sunk to their lowest since 2002, the Standard & Poor's/Case-Shiller 20-city index showed last month. Since the bubble burst, prices have fallen more than they did during the Great Depression. It took 19 years for the housing market to regain its losses after the Depression ended.

And this time, prices aren't expected to come back up anytime soon.

Home building was uneven across the country: It fell 3.3 and 4.1 percent last month in the Northeast and Midwest, respectively, but rose 1.5 percent and 18.1 percent in the South and West. The big gains in the West were largely due to increased apartment construction.

Many foreclosures have been delayed as regulators and state attorneys general work out the details of new lending requirements and penalties for banks. Until those rules are finished, banks won't ease their stricter lending rules. Most private lenders are requiring 20 percent down payments.

Few people think it makes sense to put their home on the market in this environment. Roughly 92 percent of homeowners say it's a bad time to sell, according to the latest Thomson Reuters/University of Michigan index of consumer sentiment.

In some badly hit areas, such as Phoenix, Tampa and Las Vegas, a housing recovery could take years.

The homebuilders' trade group said Wednesday that its survey of homebuilder sentiment fell to 13 -- the lowest level since September. Any reading below 50 indicates negative sentiment about the market. The index hasn't reached that level since April 2006.

Builders are not hopeful for a turnaround this year. An index that gauges sales expectations over the next six months fell in June to its lowest level on records dating back to 1985.

The weak housing market is weighing on the overall economic recovery.

But housing helps the broader economy in other ways.

Home equity accounts for most of the wealth of typical households. Equity is nearing its lowest point on records going back to the end of World War II. When prices fall, state and local property tax collections dry up and people spend less. Consumer spending fuels about 70 percent of the U.S. economy, more than any other industrialized nation.

In past modern-day recessions, housing accounted for 15 to 20 percent of overall economic growth. This time around, between 2009 and 2010, housing contributed just 4 percent to the economy.