U.S. housing starts rose to their highest rate in more than four years in October, suggesting the housing market recovery was gaining steam, even though permits for future construction fell.
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The Commerce Department said on Tuesday housing starts increased 3.6 percent to a seasonally adjusted annual rate of 894,000 units — the highest since July 2008. Economists had expected groundbreaking to slow to an 840,000-unit rate.
The department said superstorm Sandy, which slammed the East Coast in late October, had a minimal impact on the data. Groundbreaking in the Northeast, which fell 6.5 percent last month, accounted for about 8 percent of overall housing starts.
"We expect to see further strength in the housing market next year, driven by the multifamily sector. Home values are rising, which will help the low-growth economy we have," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
The housing market has turned around after an unprecedented collapse that landed the economy in its worst recession since the Great Depression. The recovery, marked by rising home sales, prices and building activity is being driven by pent-up demand against the backdrop of record low mortgage rates. (Read More: Builders Bump Up Thanks to Drop in Existing Home Supply)
The Federal Reserve has targeted housing as a channel to boost growth, announcing in September that it would buy $40 billion in mortgage-backed securities per month until the outlook for employment improved substantially.
A steady rise in the number of U.S. households, which fell during the 2007-09 recession as financially strapped Americans moved in with family and friends, is propping housing.
Economists at Goldman Sachs estimate that household formation — the net increase in the number of households each year — will increase to a 1.2 million rate in 2013 from 1 million currently.
They forecast housing starts rising to a 1 million rate by the end of next year and 1.5 million by the end of 2016.
Adding to GDP
Groundbreaking for new homes has risen 41.9 percent over the last year, but starts remain about 60 percent below the peak of 2.27 million reached in January 2006.
Homebuilding is expected to add to gross domestic product growth this year for the first time since 2005. (Read More: Could Housing Be the Antidote to the 'Fiscal Cliff'?)
Though home construction accounts for about 2.5 percent of GDP, economists estimate that for every new house built, at least three new jobs are created.
Last month, groundbreaking for single-family homes, the largest segment of the market, eased 0.2 percent to a 594,000-unit pace. Starts for multi-family homes surged 11.9 percent to a 300,000-unit rate, partly reflecting increased demand for rental apartments.
Building permits fell 2.7 percent to an 866,000-unit pace in October after jumping 11.1 percent the prior month, in line with expectations. The drop last month was concentrated in the multifamily segment and is likely to be short-lived.
A report on Monday showed confidence among homebuilders hit its highest level in 6-1/2 years in November.
Permits to build single-family homes rose 2.2 percent last month to a 562,000-unit pace. Permits for multi-family homes fell 10.6 percent to a 304,000-unit rate.
