U.S. housing starts dropped 1.1 percent last month to a seasonally adjusted 698,000 annual rate, the Commerce Department announced.

The figures follow an upwardly revised 706,000-unit pace for January, and were the best since October 2008.

 National Association of Home Builders Chairman Barry Rutenberg said the report was somewhat encouraging.

"Builders are reporting increased buyer interest and are expecting demand for new homes to improve in the coming months, but continue to exercise caution regarding new projects until that interest translates into more signed sales contracts," said Rutenberg, who is also a home builder from Gainesville, Fla. "This process is certainly being slowed by today's overly tight lending conditions, the difficulty of obtaining accurate appraisals on new construction and competition from distressed properties that can make it tough for prospective new-home buyers to sell an existing home."   

David Crowe, the association’s chief economist, noted that member surveys have shown builder confidence is growing.

"NAHB's most recent builder surveys have shown steady improvement in builder expectations for the next six months, and today's report reflects that optimism in the permit numbers, which are up across the board and are typically the most statistically reliable data," Crowe said. "At the same time, we believe that January's exceptionally good weather was a factor in pulling some single-family starts activity forward that might otherwise have occurred in February."