NEW YORK (CNN/Money) - Housing activity fell in July, according to a government report released Tuesday, but the results were still above Wall Street's expectations as construction of single-family homes climbed higher.

The Commerce Department report showed housing starts dropped to a 2.042 million unit annual rate from a revised figure of 2.045 million rate in June.

Economists surveyed by Briefing.com had forecast a 2.025 million annual sales pace for July.

Building permits, an indicator of future builder confidence, rose to a 2.167 million unit annual rate in July -- the highest level in 32 years -- from 2.132 million in June.

Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors, said that low mortgage rates have helped keep the housing market hot so far, but it's not sustainable.

The Federal Reserve started hiking short-term rates in June 2004, and it has raised rates by a quarter-percentage point for 10 straight meetings to reach the current 3.5 percent level.

Economists expect the Fed to raise short-term rates to 4.5 percent by the end of the year, according to a recent survey conducted by The Wall Street Journal.

Rising short-term rates should make it more expensive for consumers to borrow money, since the Fed's actions tend to lead to similar increases in credit-card rates, adjustable-rate mortgages and car loans. But long-term rates remain relatively low at about 4.27 percent.

Johnson added that any weakness will become evident in the average and median existing and new homes sales prices.

"The fact that you start a home doesn't mean that you sell a home," he said. "Anecdotally, there are reports that prices are starting to get unstuck, but you're going to have to watch existing homes sales and new homes sales carefully."

Single-family homes bolstered the July housing starts report, climbing 0.5 percent to 1.711 million, while multi-family starts fell to 289,000 from 306,000 units in June.

Once again, housing starts in the South outpaced the rest of the country but were down from June. Housing starts in the South fell to 980,000 units from 1.036 million units.

In the Midwest, housing starts jumped to 371,000 units from 340,000. Housing starts in the Northeast were up to 196,000 from 184,000 units, while the report indicated that starts in the West climbed to 495,000 from 485,000 units.