Housing starts in the U.S. increased more than forecast in August, a signal the industry is stabilizing.

Builders broke ground on homes at an annual rate of 598,000, up 10.5% and the most since April, following a 541,000 pace in July, the Commerce Department said Tuesday.

Economists forecast August starts at a 550,000 pace, according to the median estimate in a Bloomberg News survey. Building permits, a proxy of future activity, rose from a record low.

Mortgage rates are close to record lows, perhaps giving builders some confidence to begin new projects after the expiration of a government tax credit caused sales to plunge. Even so, a housing recovery is dependent on a drop in the unemployment rate, which is currently near 10%.

"The housing market has found a bottom and we're bouncing along here," said Thomas Simons, an economist at Jefferies Group Inc. in New York. "The market is challenged by supply, and until that is cleared out it will be tough for the home builders. We also need additional job creation."

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