By Lucia Mutikani
WASHINGTON (Reuters) - Permits for future U.S. home construction hit a near 5-1/2 year-high in October and prices for single-family homes notched big gains in September, suggesting a run-up in mortgage interest rates has not derailed the housing recovery.
The data releases on Tuesday were the latest signs of strength in the economy, despite headwinds from rising mortgage rates and last month's partial government shutdown.
"The reports reinforce the notion that the housing sector is successfully digesting the summer mortgage rate pop," said Mike Englund, chief economist at Action Economics in Boulder, Colorado.
Building permits jumped 6.2 percent last month to an annual rate of 1.03 million units, the highest since June 2008, the Commerce Department said. It was only the second time since mid-2008 that permits breached the 1 million-unit mark.
Last month's increase beat economists' expectations for a 930,000-unit rate. Permits, which lead housing starts by at least a month, rose 5.2 percent in September and were up 13.9 percent from a year ago in October.
A separate report showed the S&P/Case Shiller composite index of home prices in 20 metropolitan areas jumped 13.3 percent in September from a year ago, the strongest gain since February 2006.
Stocks on Wall Street were little changed in thin pre-holiday trade, while prices for U.S. Treasuries rose. The dollar was weaker against a basket of currencies.
House prices have largely been driven by a supply squeeze as a glut of foreclosed properties clears. But the combination of rising prices and mortgage rates means some potential buyers are being pushed out of the market.
This will dampen demand and is expected to gradually slow the pace of house price increases in coming months.
"While demand for housing remains as strong as ever, credit is tight, flood insurance rates are on the rise, mortgage rates are elevated and income growth has not kept pace with price growth," said Stephanie Karol, a U.S. economist at IHS Global Insight in Lexington, Massachusetts.
A Reuters survey published on Tuesday forecast home prices rising 6.5 percent next year, roughly half the pace expected in 2013.
Interest rates have risen sharply since May as markets anticipated the Federal Reserve would start cutting back on its monthly bond purchases this year, with the 30-year fixed mortgage rate surging nearly a full percentage point.
It hit 4.49 percent in September, the highest since July 2011, according to mortgage lender Freddie Mac. But rates have been retreating as expectations of a Fed taper are pushed to early next year, averaging 4.19 percent last month.
FED CLOSER TO TAPERING?
Some economists said the housing data, combined with stronger-than-expected October nonfarm payrolls and retail sales reports, raised the risk the Fed could scale back its massive monthly bond purchases as early as December.
"The jump in building permits means that another obstacle to tapering is now removed," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.
"The weakness in housing starts and new home sales were probably one important reason - besides the slowdown in payroll gains - why the Fed did not taper in September."
The U.S. central bank noted at last month's meeting that the recovery in the housing sector had slowed somewhat in recent months. Fed policymakers next meet on December 17-18.
The strong march in house prices, rising stock market prices and improvements in job gains are not helping to lift household spirits, which could be a challenge for retailers during the holiday shopping season.
In a third report, the Conference Board said its index of consumer attitudes fell to 70.4 this month from 72.4 in October. Consumers' labor market assessment was little changed.
But while building permits are not counted in gross domestic product (GDP), they are a key indicator of economic activity and the sturdy gains in both September and October should ease concerns the housing market recovery was stalling.
"The building permits reports suggest some upside risks to GDP growth in the coming quarters from construction activity," said Millan Mulraine, senior economist at TD Securities in New York.
Though higher mortgage rates have slowed the pace of home sales, demand for accommodation as household formation continues to recover from multi-decade lows is expected to keep supporting residential construction.
Permits for the multifamily home sector surged 15.3 percent in October and approvals for buildings with five units or more reached their highest level since June 2008. Single-family home permits, the largest segment of the market, rose 0.8 percent.
The Commerce Department postponed the release of figures on housing starts and completions for September and October until December 18 because the collection of data was affected by the 16-day shutdown of the government last month.
November data also will be published at that time. The partial shutdown of the federal government also delayed the publishing of the September and October permits reports.
(Reporting By Lucia Mutikani, additional reporting by Rodrigo Campos in New York; Editing by Andrea Ricci and Krista Hughes)