NEW YORK (CNN/Money) - New home construction in the United States accelerated in October to the fastest pace in nearly 18 years, the government said Wednesday, defying Wall Street forecasts for a slowdown.

And the ever-rising flood of new homes appeared to be supported by demand, some economists said, indicating home prices were unlikely to be artificially inflated into a dangerous "bubble."

The Commerce Department said the pace of housing starts rose 2.9 percent to a seasonally adjusted annual rate of 1.96 million units, after rising a revised 4 percent to 1.91 million units in September. Economists, on average, expected housing starts to fall to a 1.85 million-unit pace, according to Briefing.com.

It was the fastest pace of housing starts since 1.97 million units in January 1986.

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"It boils down to housing affordability; mortgage rates have risen, but they're still historically very low," said Sung Won Sohn, chief economist at Wells Fargo & Co. "We're continuing to see people who had been sitting on the fence jumping in to take advantage of these low rates before they go back up."

"And now that the economy is improving, people have greater confidence to make purchases and build homes," Sohn added.

Building permits, a forward-looking indicator of housing demand, jumped 5.2 percent to an annualized pace of 1.97 million units, a record high, after falling 1.4 percent to a 1.87-million-unit pace in September. Economists, on average, expected permits at a pace of 1.85 million units.

Unlike the late 1980s and early 1990s, when builders slapped together houses in a speculative frenzy that resulted in a glut of inventory and sudden price drop, the current building boom is based on solid demand, economists said.

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"When you look at how homebuilders operate now, it's not like they build homes and wait for them to be sold," said Scott Brown, chief economist at Raymond James & Associates. "They're taking orders and then building. When things slow down, there's not going to be a bubble collapse or anything like that."

According to the Commerce Department report, October's housing-start gains were concentrated in the West and South, which saw gains of 17.7 percent and 4.9 percent, respectively. The Northeast saw an 18 percent drop in the pace of sales, while the Midwest saw an 8-percent drop.

The news had little impact on U.S. stock prices, which rose in early trading. Treasury bond prices fell, pushing up yields -- which move opposite to price.

Super-low interest rates, driven by an accommodative Federal Reserve and a long stretch of sluggish economic growth, have helped keep mortgage rates at historic lows, encouraging a housing boom.

Home sales have encouraged consumer spending on furniture, building supplies and other household products, and mortgage refinancing has allowed many homeowners to lower their monthly payments and tap into some of their swollen home equity.

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Interest rates rose in the late summer amid signs of an economic pickup, leading many economists to believe the red-hot housing market would cool off. But rates have stayed low through the fall, and demand for homes has consistently defied expectations.

"Even though [mortgage] rates have been up a little bit, they're still, from a 30- to 40-year perspective, at historic lows," Doug Duncan, chief economist for the Mortgage Bankers Association of America, told CNNfn. "It's still a great purchasing environment for people who want to get into housing."

And many economists think rates are likely to stay relatively low for some time, with the Fed promising to keep its key short-term rate at the lowest level since the Kennedy administration through at least the spring of 2004.

But some economists worry that the Fed is behind the curve, saying that inflation expectations will gather steam, forcing interest rates higher to keep up and eventually forcing the Fed raise rates more quickly than it would have liked.

"In this environment, the longer the Fed holds real short-term interest rates below zero, the more inflationary pressures will increase, and the higher the Fed will be forced to lift rates when it finally tightens," Brian Wesbury, chief economist at Griffin Kubik Stephens and Thompson, said in a research note this week.

John Talbott, a visiting scholar at UCLA's Anderson School of Business and author of "The Coming Crash in the Housing Markets," has warned that such a scenario would trigger a devastating collapse in home prices.

Most economists, however, still believe the increase in interest rates will be more gradual and that the housing market's eventual decline will be orderly.

"By early next year we expect starts to have begun to decline, though activity can probably remain close to current levels for another couple of months," said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd.