Home builders broke ground on new homes at a faster pace in January, exceeding expectations and raising hopes that 2012 will mark a turnaround in the embattled housing sector.

Builder home starts in January were at an annual pace of 699,000—up 1.5 percent from December’s strong showing, and up nearly 10 percent from January of 2011. Issued permits were also up from December, and improved nearly 20 percent in activity year-over-year.                

Analysts suggest that the numbers represent a genuine positive for housing, which saw one of its worst years on record in 2011. The confluence of low borrowing costs, lower prices and stabilization in employment have brought out buyers, and homebuilders are reporting increases in both orders and traffic. Home builder sentiment, as measured by the National Association of Home Builders, shot to a 5-year high this month, thanks to these strengthening factors.

Yet with all the optimism, 2012 will likely remain a challenging one for new home builders, who continue to compete with distressed housing, and are deeply affected by tight lending conditions both for construction and for buyers. And the recent State Attorneys General agreement with some of the nation’s largest banks is likely to prompt a resurgence of foreclosure activity over the short term, as banks begin to reclaim and purge homes in which owners have fallen behind on—or ceased to pay—their mortgages. Such actions will likely provide difficulties for builders this year, but most experts agree that expunging the impending foreclosure inventory is best for the health of the housing industry—and for new home builders—moving forward.