NEW YORK (CNN/Money) - New home construction had its best month in more than three years in February, the U.S. government said Wednesday, as the housing market, already one of the strongest sectors of the economy, gained strength at the end of the first recession in a decade.
February housing starts jumped 2.8 percent to an annual rate of 1.77 million, the Commerce Department reported, up from a revised 1.72 million rate in January. Economists surveyed by Briefing.com had expected a 1.63 million rate in February. The reading was the highest since December 1998.
Especially encouraging were starts of single-family homes, which jumped 7.4 percent to a 1.46 million unit rate -- the highest since December 1978 -- from a 1.36 million rate in January.
New building permits, an indication of builders' expectations for future activity, rose 1.8 percent to a 1.75 million rate in February, compared with an upwardly revised 1.72 million rate in January. Economists surveyed by Briefing.com expected a 1.65 million rate in the month.
"I don't think there's really any doubt the housing market remains extremely robust and growing," said Lara Rhame, economist at Brown Brothers Harriman. "I had expected housing to fade. Now that we're out of recession, I don't really know what would knock it down at this point."
U.S. stock prices fell, driven lower by concerns about Intel (INTC: down $1.19 to $30.53, Research, Estimates) and the possibility of the Federal Reserve raising interest rates, while Treasury bond prices were mostly higher.
During a recession that likely began in March 2001, the two pillars of strength in the economy were consumer spending and the housing market. Both were propped up by low interest rates -- the Federal Reserve slashed short-term interest rates 11 times in 2001 to help consumers, and low mortgage rates helped the housing market.
High home prices helped consumers by boosting their balance sheets and easing the pain of lower stock prices. But many observers have been waiting for home sales and prices to fall, saying they cannot possibly stay this high for this long.
"This is obviously exuberant behavior by builders," said David Seiders, chief economist at the National Association of Home Builders. Though builders usually don't start projects without a contract in hand, Seiders said, a good bit of the demand for housing has been weather-related.
"I'm looking for some fall-back in starts numbers," Seiders said. "Sales will be good, but I don't think we can sustain this kind of starts pace without an inventory problem cropping up."
The Fed has decided at its last two policy meetings to leave interest rates alone and on Tuesday said the risks to the economy were evenly balanced between a risk of weakness and a risk of inflation. Most economists expect the Fed to start raising interest rates later this year. Mortgage rates also are likely to rise, and demand for mortgages has slipped lately.
"The surge in activity is a lagged response to the strength of new home sales, and with mortgage demand now well off its highs -- though still strong -- it probably can't last," said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. "But there is no reason to expect an immediate plunge, not least because permits rose again in February, for the fourth straight month."
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