The Commerce Department said Wednesday housing starts increased 0.9 percent to a seasonally adjusted annual rate of 891,000 units. July's starts were revised down to a 883,000-unit pace instead of the previously reported 896,000 units.
Economists had expected groundbreaking to rise to a 917,000-unit rate last month.
Starts for the volatile multifamily segment tumbled 11.1 percent to a 263,000-unit rate last month. But groundbreaking for single-family homes, the largest segment of the market, surged 7.0 percent to a 628,000-unit pace.
That was the highest since February and took some of the sting out the report. The drop in multifamily starts suggested a spike in mortgage rates could be making developers a bit cautious about taking on new projects.
Higher mortgage rates have slowed the pace of home sales, but demand for accommodation as household formation continues to recover from multidecade lows is expected to keep residential
In a separate report, the Mortgage Bankers Association said applications for loans to buy a home rose last week as mortgage rates eased off recent highs.
Mortgage rates have risen in anticipation of the Federal Reserve reducing the $85 billion in bonds it is buying each month to keep interest rates low. Economists believe the Fed will make an announcement on the future of the program at the end of a two-day meeting later Wednesday.
U.S. financial markets were little moved by the data as investors awaited the Fed's statement on policy.
Permits to build homes fell 3.8 percent in August to a 918,000-unit pace, confounding economists' expectations for a 950,000 rate. Permits lead starts by at least a month. But the drag last month came from the multifamily sector, where permits dropped 15.7 percent. Permits for single-family
homes rose 3 percent to their highest level since May 2008.
The rise in single-family permits fits in with a survey Tuesday showing confidence among single-family homebuilders held near an eight-year high in September, with builders upbeat about
prospective buyer traffic.
The sustained gains in residential construction should help to support the economy.
Though home building only accounts for 3.1 percent of gross domestic product, economist estimate that for every single-family home constructed, three jobs that last for a year are created.