Economists polled by Reuters had expected starts to rise to a 969,000-unit rate last month.
The housing market is regaining its footing after being slammed by last year's run-up in interest rates. A shortage of properties for sale has also lifted prices, pushing housing out of the reach of many first-time buyers.
Groundbreaking for single-family homes, the largest part of the market, increased 8.3 percent in July to a 656,000-unit pace. Single-family starts in the South rebounded 16.9 percent last month after dropping sharply in June.
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Starts for the volatile multi-family homes segment jumped 33 percent to a 423,000-unit rate, the highest level since January 2006. This market segment is being buoyed by a shift towards renting, as many prospective buyers give up on the dream of owning a house.
The government reported last month that the homeownership rate hit a 19-year low in the second quarter, while the rental vacancy rate was the lowest in more than 19 years.
Last month, permits rose 8.1 percent to a 1.05-million unit pace.