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By Steve Goldstein, MarketWatch
WASHINGTON (MarketWatch) — Housing starts surged 15% in September to the highest level in 17 months, according to government data released Wednesday, as increased demand for rental stock as well as rebuilding after Hurricane Irene contributed to the upturn.

The Commerce Department said starts rose to a seasonally adjusted annual rate of 658,000, which also is 10.2% above the September 2010 reading and the best level since April 2010 — the month the homebuyer tax credit expired. The figures were well ahead of the 590,000 forecast in a MarketWatch-compiled economist poll.

The rise was led by a 53% surge in starts of buildings with five or more units to 227,000, the best reading in three years; single-family starts rose a more modest 1.7% to 425,000, which is only a two-month high.

Rental demand is booming, as buyers struggle to get the credit needed to purchase homes even with mortgage rates near record lows and as some show a reluctance to re-enter the housing market over fears of declining prices.

“The big gain in multfamily is consistent with what we have seen in construction spending and is leading the slow recovery in the construction industry,” said Jed Kolko, chief economist of real estate web site Trulia. “That’s in response to rising rents that show the relative tightness of the rental market.”

The starts data can be highly volatile, with September’s data having a margin of error of plus or minus 13.7%.

The less-volatile building permits figures declined 5% to 594,000, and single-family permits eased 0.2%.

August’s reading on housing starts was revised modestly higher, to 572,000 from 571,000, and August’s reading on permits was revised higher to 625,000 from an initial reading of 620,000.

In any case, the data still show that housing has a long way to go to recover — at the peak, there were 2.07 million units started in 2005.

The glut of foreclosed and soon-to-be-foreclosed homes, the number of underwater mortgage owners, high unemployment and tough credit standards all have contributed to weakness in housing.

But data of late have shown signs of stabilization.

On Tuesday, home-building stocks /quotes/zigman/1496092/quotes/nls/itb ITB -0.98% rallied on the release of builders confidence data for October that recovered to the highest level — a still-bleak 18 on a scale of 1-to-100 — since May 2010. See story on home-builders index.

Builders extended gains Wednesday, with PulteGroup /quotes/zigman/129784/quotes/nls/phm PHM +2.38% and D.R. Horton /quotes/zigman/224125/quotes/nls/dhi DHI +1.59% stronger in early action.

As with the home-builders sentiment data, the figures on housing starts were led by activity in the West, where starts gained 18.1% to hit a three-year high. In the South, the largest market for new homes, starts rose 15.7% to register the best reading since April 2010.

However, both those markets were led by apartments; single-family starts dropped 9.4% in the South and were flat in the West.

Trulia’s Kolko said what appears to be happening is that the hardest-hit areas like California, Florida and Nevada are seeing shifts in demand to apartments, because the vacant houses can’t be rented out.

“It requires management to have and maintain rental units, and a lot of vacant stock is not where renters tend to live,” he said.

Separately, the Labor Department said consumer prices rose 0.3% in September.
/quotes/zigman/1496092/quotes/nls/itb Add ITB to portfolio ITB iShares Dow Jones U.S. Home Construction Index Fund $ 10.10 -0.10 -0.98% Volume: 1.17MOct. 19, 2011 4:00p
/quotes/zigman/129784/quotes/nls/phm Add PHM to portfolio PHM PulteGroup Inc. $ 4.54 +0.11 +2.38% Volume: 16.57mOct. 19, 2011 4:10p
/quotes/zigman/224125/quotes/nls/dhi Add DHI to portfolio DHI D.R. Horton Inc. $ 10.61 +0.17 +1.59% Volume: 8.19mOct. 19, 2011 4:10p
Steve Goldstein is MarketWatch’s Washington bureau chief.