U.S. Housing Starts Rise by 9.8% in February, Led by a Surge in Apartment Construction

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New home construction bounced back in February for the first time in six months, led by apartment buildings, but it’s unclear if the bounce translates into a recovery for the housing market.

The numbers: Construction on new U.S. homes rose 9.8% in February to 1.45 million, the government said Thursday. The numbers are seasonally adjusted.

The rise in construction of homes follows a decline in January, when housing starts fell by 2%. New home construction is up for the first time in six months.

The increase was larger than what Wall Street expected. Economists polled by the Wall Street Journal expected housing starts to stay at a 1.31 million rate from January’s initial estimate of 1.31 million.

In January, housing starts were revised to a drop of 2% of 1.32 million, as compared to a previous drop of 1.31 million.

Building permits for new homes surged 13.8% to 1.52 million in February. Economists had expected building permits to rise to a 1.34 million rate from January’s initial estimate of 1.34 million.

Key details: The construction pace of single-family homes rose 1.1% in February and apartments jumped 24.1%.

Single-family construction in the West led the jump with a 28.5% increase. The Midwest and South regions reported a drop in single-family construction.

Regionally, construction of homes rose the most in the Midwest, by 70.3%, and the West, by 16.8%.

Permits for single-family homes rose 7.6% in February, while permits in buildings with at least five units rose by 24.3%.

Overall, housing starts are down year-over-year. The annual rate of total housing starts fell from 18.4% from the previous year.

Big picture: The better-than-expected housing starts data was due to a boom in apartment construction and with the U.S. facing a housing deficit, the addition of multi-family units is likely to boost affordability.

Yet mortgage rates remain volatile, so buyers are getting mixed signals from the U.S. economy as well as the housing market.

Nevertheless, builders are still cautiously optimistic about sales, given that they’re one of the few players adding inventory, as well as thanks to their ability to offer mortgage rate buy-downs and other incentives.

What are they saying? “The recent recovery in several measures of the U.S. housing market, while encouraging for the industry as well as the U.S. economy, are not-so-good news for the Federal Reserve,” Eugenio J. Aleman, chief economist and senior vice president at Raymond James, wrote in a note.

The Fed is “counting on a weak housing market to keep home price increases at bay so they can contribute to lower inflation,” he added.

Analysts at Jefferies warned that “the strength this month is surprising, but it also looks like it is probably an idiosyncratic one-off.”

Market reaction: U.S. stocks opened lower on Thursday. The yield on the 10-year Treasury note fell to 3.4%.

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