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U.S. single-family housing starts, permits show recovery on track

New townhouses under construction are seen in Fairfax, Virginia, just outside of the capital Washington, September 1, 2013. REUTERS/Larry Do
New townhouses under construction are seen in Fairfax, Virginia, just outside of the capital Washington, September 1, 2013. REUTERS/Larry Do

By Lucia Mutikani

WASHINGTON (Reuters) - Groundbreaking for U.S. single-family homes rose in August and permits for future construction hit a five-year high, pointing to resilience in the housing market recovery in the face of higher mortgage rates.

The Commerce Department said on Wednesday single-family starts surged 7.0 percent to an annual rate of 628,000 units last month, the highest level in six months. Single-family homes are by far the largest segment of the market.

Groundbreaking for the volatile apartments and condominiums segment, however, tumbled 11.1 percent. That curbed the rise in overall housing starts to an 891,000-unit pace, far less than the 917,000-unit rate economists had expected.

While higher mortgage rates have slowed the pace of home sales, demand for accommodation as the rate of new household formation recovers from multi-decade lows is expected to keep residential construction supported.

"Homebuilding seems to be holding up decently in the higher mortgage rate environment, probably due to the support of strong underlying fundamentals - thin inventories and steady household formation," said Guy Berger, an economist at RBS in Stamford Connecticut.

Mortgage rates have risen in anticipation of the Federal Reserve reducing the $85 billion in bonds it has been buying each month to keep interest rates low.

The U.S. central bank, however, surprised markets on Wednesday by sticking to its bond-buying program. The Fed said tightening financial market conditions, if sustained, could slow the pace of improvement in the economy and labor market.

Stocks on Wall Street rallied on the Fed statement, with the Standard & Poor's 500 index <.SPX> hitting a record high. The dollar dropped to a seven-month low against the euro, while U.S. Treasury debt prices soared. <.N>

RESIDENTIAL CONSTRUCTION SLOWING

In a separate report, the Mortgage Bankers Association said applications for loans to buy homes rose last week as mortgage rates eased off recent highs. Since early May, rates on 30-year mortgages have risen about 1.2 percentage points.

Still, mortgage rates remain historically low and economists do not expect the increase to throw the housing recovery off track. Homebuilding is expected to slow a bit this quarter from the second quarter, but still contribute to growth this year.

Though residential building only accounts for 3.1 percent of gross domestic product, economists estimate that for every single-family home constructed, three jobs that last for a year are created.

Last month, permits for single-family homes rose 3 percent to their highest since May 2008.

A survey on Tuesday showed confidence among single-family homebuilders held near an eight-year high in September, with builders upbeat about prospective buyer traffic.

"We expect to see a more meaningful rebound in construction activity in the coming months," said Millan Mulraine, senior economist at TD Securities in New York.

Permits for multifamily homes, however, dropped 15.7 percent last month, pushing down overall permits 3.8 percent to a 918,000-unit pace.

The drop in both multi-family starts and permits suggested higher mortgage rates could be making developers a bit cautious about taking on new projects. Builders have also been complaining about expensive materials and a shortage of labor.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci, Tim Ahmann and James Dalgleish)

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