It was a lackluster August for Twin Cities home builders.

Last month 256 permits were issued to build 437 units, a 4 percent increase in permits but a 5 percent decline in units compared with a year ago, according to the Builders Association of the Twin Cities. Minneapolis led the metro with 125 units, including a 122-unit apartment building.

More than halfway through the year it's clear that the construction industry can't claim a recovery. So far this year the number of permits is down 8 percent and the total of units has fallen 16 percent -- though units permitted in August were up 18 percent from July.

While housing construction has fallen to historic lows for several years and builder inventories are down to healthier levels, continuing declines in sale prices of existing homes and an uncertain economic recovery have made prospective new-home buyers unusually cautious.

"The regional residential housing industry has remained in a holding pattern for almost three years, but we continue to see promising signs," said Rich Riemersma, president of the Builders Association of the Twin Cities and co-owner of Imperial Homes.

One promising sign is that the inventory of unsold houses, both new and used, is relatively low. Many of the existing listings are distressed properties that can't compete with new houses, said Dennis Guldseth, a sales agent with Coldwell Banker Burnet. And many big developers are focusing on rental housing, which is in high demand.

The average vacancy rate in the Twin Cities is now at about 2 percent, and demand in some area outstrips supply. More than a third of all new housing units permitted in the metro area are rental apartments. And in Minneapolis the number of planned housing units -- most of them rentals -- doubled from 2010 to 2011, according to a report issued last week by the Minneapolis Planning and Economic Development department.

Because many new-home buyers today are corporate relocations or move-up buyers who have enough cash to buy new without selling an existing house, Guldseth said that demand is strongest for move-up houses.

Sharry Schmid, a sales manager for Edina Realty and the person in charge of the company's Builders Resource Group, said those buyers are willing to pay a premium for a location that's within easy access of downtown Minneapolis and St. Paul. That includes smaller subdivisions in mostly developed communities.

Despite an abundance of developable land in second- and third-ring suburbs, Edina, for example, continues to be a place where existing houses are torn down and replaced with bigger and more expensive ones.

Despite stronger demand from upper-bracket buyers, the total value of the permits in August was only $629.6 million, about half the value for the same period in 2007 but up from August 2009, when permits were worth just under $500 million.

Jim Buchta • 612-673-7376