WASHINGTON -- Housing starts defied expectations by posting a second straight gain in August, the government reported yesterday, indicating the housing sector is not cooling off as fast as expected in the wake of higher interest rates.

Starts grew 2. 1% in August to a seasonally adjusted annual rate of 1.442 million units, the Commerce Department reported. Analysts had expected a small decline, following a 4.1% gain in July.

A surge in the construction of apartment buildings more than offset a drop in single-family units, the fourth in the last five months. Analysts had expected a decrease given higher mortgage rates, and they were not terribly surprised that multifamily units jumped given low apartment vacancy rates.

"The overall number was stronger than expected, but the components weren't that surprising," said Gary Thayer, senior economist of A.G. Edwards & Sons Inc. in St. Louis.

Starts of structures with two or more units climbed 28.5% in August to a 275,000 annual rate, following a 9.7% gain in July. Meanwhile, starts of single-family units fell 2.7% to a 1.167 million annual rate after a 3.1% advance in July.

The pace of home building has generally slowed this year compared with the end of last year. However, starts have not headed downward in the last several months; total starts have gained three out of the last four months and four out of the last six months.

Economists acknowledged that the Federal Reserve's five interest rate increases so far this year have not taken as big a bite out of the residential building sector as they had expected. "If the Fed is looking to the housing sector to slow the economy, it isn't doing it," said Russell Sheldon, senior economist of Mellon Bank in Pittsburgh.

He and other analysts predicted that starts and home sales will decline only gradually in the remaining months of this year. This, they said, would put only a modest drag on growth in the second half of this year.

David Berson, chief economist of the Federal National Mortgage Association, noted that strong employment and income growth are offsetting much of the negative impact of higher mortgage rates. He also pointed out that 30year fixed-rate mortgages have not climbed drastically in the last several months, with rates averaging 8.51% in August compared to 8.32% in April.

Berson predicted that mortgage rates will remain relatively stable through the end of the year, but that single-family starts will decline gradually as growth in the economy slows. "The housing market is not falling off the edge," Berson said. He predicted that apartment construction will remain strong in the coming months, following several years of under-building.

Stuart Hoffman, chief economist of PNC Bank Corp., said the latest housing figures report probably nudged the Fed one step closer to another rate increase. "Higher rates have halted the home building upturn, but we have not seen much of a downturn yet," he said. Analysts predict the Fed will raise short-term rates by another 50 basis points to 5.25% no later than the Nov. 15 meeting of the Federal Open Market Committee given a continuing stream of strong economic reports. Some say the chances are increasing that the Fed will have to act before the Nov. 15 meeting.

Hoffman said the Fed may move as early as the next FOMC committee meeting on Tuesday. But for now, he still expects the Fed to wait until November.

Yesterday's report also showed that building permits are holding relatively steady. Permits grew 1% in August to a 1.35 million rate, following a 1.6% increase in July.

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