New-home construction in the U.S. climbed in September, a sign residential real estate will bolster the world’s largest economy.

Housing starts increased 6.5 percent to a 1.21 million annualized rate, more than forecast and the second-highest level in eight years, figures from the Commerce Department showed Tuesday in Washington. A drop in building permits indicates the rebound will be slow to materialize.

American consumers, powered by an improving job market, are keeping the U.S. afloat as they continue to spend on big-ticket items such as homes and cars. A pickup in wage gains would give even more households the ability to save for a down payment, helping to sustain momentum in the housing industry.

“The trend in housing should remain relatively strong,” said Thomas Costerg, a senior U.S. economist at Standard Chartered Bank in New York, who is among the top forecasters of housing starts data according to data compiled by Bloomberg. “It’s a steady grind higher. It’s quite a steady, healthy trend.”
Estimates for housing starts in the Bloomberg survey of 78 economists ranged from 1.09 million to 1.2 million. The August figure was 1.13 million, little changed from the prior estimate.

The increase in starts was mainly propelled by gains in work on multifamily homes, such as apartment buildings, which rose 18.3 percent to a 466,000 pace. The advance highlights increasing demand for rentals.

Construction of single-family houses climbed 0.3 percent to a 740,000 rate, the report showed.

Fewer Permits
Building permits declined 5 percent to a 1.1 million pace, the fewest since March. The decrease was also concentrated in multifamily, showing that these data can be volatile.
Applications for single-family projects fell 0.3 percent to a 697,000 pace, suggesting this part of the market will plateau in coming months. Those for multifamily developments dropped 12.1 percent to a 406,000 rate.

Three of four regions had an increase in starts in September, paced by an 25.4 percent jump in the West, according to the report. Construction declined 12.2 percent in the Midwest, the biggest drop since February.

The starts data are consistent with a report Monday that showed builders are increasingly confident in the outlook for their industry. The National Association of Home Builders/Wells Fargo said its sentiment gauge rose in October to the highest level in a decade, lifted by stronger confidence about the six-month sales outlook.

Mortgage Rates
The continued expectation of low interest rates may be part of those prospects. The average 30-year, fixed-rate mortgage was 3.82 percent in the week ended Oct. 15, compared to an average of 6.15 percent in the previous expansion.

Borrowing costs may rise as the Federal Reserve comes closer to deciding whether they will increase interest rates this year for the first time since 2006. While policy makers delayed a hike at their meeting last month, they’ll have another opportunity at meetings next week and in December.

Central bankers have been weighing data on the labor market as part of their consideration. Payrolls have added an average 198,000 workers each month this year, getting many consumers closer to the ability of purchasing a home.

However those gains have started to moderate, with increases in August and September coming in lower than economists projected. It’ll take stronger wage growth than the 2 percent average the recovery has posted to help pick up the slack.