Multifamily projects lead to bigger-than-expected surge in residential construction

New U.S. home construction increased in February for the first time in six months, led by a surge in starts of multifamily projects and suggesting the housing market may be starting to stabilize.

Residential starts rose 9.8% last month, to a 1.45 million annualized rate, the fastest in five months, according to government data released Thursday. The pace of starts exceeded all forecasts in a Bloomberg survey of economists that had a median projection of 1.31 million.

Applications to build, a proxy for future construction, climbed 13.8%, to an annualized pace of 1.52 million units, reflecting gains in permits for both single-family and multifamily projects.

The pickup points to signs of budding optimism that the worst of the housing rout may be near. Home builder sentiment has increased for three straight months—following 12 consecutive declines last year—supply chains are normalizing and applications to purchase a home have ticked up.

That said, mortgage rates remain high and might limit any forward momentum in sales. And construction firms are still contending with elevated costs for labor and materials. While recent financial turmoil may push down borrowing costs as Treasury yields fall, it could also lead banks to tighten their lending standards.

Single-family home building increased 1.1% in February, while multifamily construction jumped 24%, the most in nearly two years. Permits for one-family homes increased for the first time in a year. Applications to build multifamily dwellings such as apartments rose to the highest level since July.

The number of homes completed rose more than 12% to a 1.56 million pace, the fastest since 2007 and led by a jump in multifamily projects.

Before the report, outlays for home construction were seen subtracting from first-quarter gross domestic product, according to the Federal Reserve Bank of Atlanta’s GDPNow estimate. Before the report, the regional Fed bank forecast residential investment to subtract about 0.4 percentage point from GDP.

New- and existing-home sales data for February will be released next week.