By Lucia Mutikani
WASHINGTON (Reuters) - The construction of U.S. single-family housing surged in September, though a drop in apartment building pushed overall home building activity to an 18 month low.
But Wednesday's report from the U.S. Commerce Department also showed building permits jumping last month, suggesting overall residential construction may rise again in the fourth quarter.
In its Beige Book report also published on Wednesday, the Federal Reserve struck an upbeat note on the housing market, saying residential real estate activity expanded in most districts in recent weeks.
"Home construction is in decent shape, despite the volatility in the multi-family segment," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "Activity is growing in the key single-family segment and permit requests are strong."
Single-family housing starts, which account for the largest share of the residential housing market, jumped 8.1 percent to a 783,000-unit pace last month. That was the highest level since February.
Low U.S. unemployment, slowly rising wages, and low mortgage rates are underpinning demand for housing. Single-family starts are also getting a boost from a chronic shortage of existing homes available for sale.
Overall groundbreaking activity, however, declined 9.0 percent to a seasonally adjusted annual pace of 1.05 million units last month, the lowest level since March 2015. It was dragged down by starts for the volatile multi-family segment, which plunged 38.0 percent to a 264,000-unit pace in September.
Starts for multi-family buildings with five or more units crumbled to their lowest level since June 2013. But with rents rising at their fastest pace in 10 years amid strong demand, September's drop in groundbreaking activity could be temporary.
The Federal Reserve's Beige Book report on business activity nationwide published on Wednesday also noted real estate activity expanded in September and early October.
The U.S. central bank said some evidence suggested optimism about future growth, though shortages of skilled labor remained a constraint on construction activity in some districts.
The PHLX index of shares in U.S. house building companies (HGX) was little changed on the day, underperforming a broadly firmer U.S. stock market. Shares in the nation's largest homebuilder, D.R. Horton Inc (N:DHI), rose 0.95 percent and Lennar Corp (N:LEN) gained 0.19 percent.
ROBUST PERMIT INCREASES
Economists polled by Reuters had forecast overall housing starts rising to a 1.18 million-unit pace in September. Last month's decline left overall housing starts in the third quarter well below their average for the second quarter.
That suggests residential construction remained a drag on gross domestic product in the third quarter after subtracting from output in the April-June period.
The Atlanta Federal Reserve estimates that GDP increased at a 2.0 percent annual rate in the third quarter after rising at a 1.4 percent pace in the second quarter.
Overall home building activity is likely to rebound in the coming months, as permits for future construction surged 6.3 percent in September to their highest level since last November. Single-family permits rose 0.4 percent last month.
Permit issuance for multi-family buildings with five or more units soared 17.2 percent to a 10-month high.
"Permits are outpacing starts, which indicates that developers and builders are finally planning for more growth ahead. That's great news for both the economy and the consumer," said Jonathan Smoke, chief economist at realtor.com in Washington.
"A persistent lack of growth in new construction has given us low vacancies in rentals and very low inventories of homes for sale. That has produced above-average increases in rents and prices, but today's data is a good sign that we could be turning the page on this troubling scenario."
Last month, single-family home construction jumped 20 percent in the Northeast. Starts in the South, which accounts for the bulk of home building, vaulted 12.1 percent.
Groundbreaking on single-family housing projects shot up 6.3 percent in the Midwest, but fell 2.2 percent in the West.