Housing starts and building permits jumped to a 1-1/2 year high in November as demand for rental apartments rose, suggesting the housing market was entering a tentative recovery.

Tuesday's data, which also showed gains in groundbreaking for single-family homes, was the latest sign of a quickening of an economic recovery that still faces risks both at home and abroad.

Investors should take heart that if Europe doesn't melt down and Congress figures out how to extend the payroll tax cut, the economy can continue to gain momentum, said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Housing starts surged 9.3 percent to a seasonally adjusted annual rate of 685,000 units, the highest level since April last year, the Commerce Department said. Economists had forecast a 635,000-unit rate.

New permits for future construction increased 5.7 percent to a 681,000-unit pace in November, the highest since March 2010. That was also above expectations.

Stocks on Wall Street climbed sharply on the housing data and a drop in Spain's borrowing costs, with major indexes up more than 2.5 percent in late trade.

U.S. Treasury debt prices fell as investors' risk appetite increased, while the dollar was weak across the board.

The data boosted shares of U.S. homebuilders, including KB Home, Pulte Group Inc and Lennar, which rose more sharply than the broader market.

The U.S. economy is showing resilience even as much of the rest of the world is slowing down, with a festering debt crisis expected to push the euro zone into recession.

There was some positive news for embattled Europe on Tuesday as data showed German business sentiment rose for a second straight month in December.

Apart from the euro zone crisis, the U.S. economy also faces a threat from tighter fiscal policy as lawmakers bicker over the extension of a payroll tax cut that expires at the end of the month.

The Republican-led U.S. House of Representatives on Tuesday rejected a bill passed by the Senate at the weekend to extend the tax cut by another two months, increasing the risk it would expire.


Falling house prices and tight lending standards have pushed Americans away from homeownership, lifting demand for rental units and boosting construction of multifamily homes in the process.

The rental vacancy rate dropped to 9.8 percent in the third quarter from a peak of 11.1 percent in 2009. While the home ownership rate edged up in the quarter, it was coming off a 13-year low.

The increase in home building last month raised optimism that the sector, which has already become less of a drag on the economy, will add to U.S. gross domestic product next year.

If so, it would be the first increase since 2005, before the housing bubble burst.

Residential construction, however, accounts for only about 2.5 percent of GDP, so any lift is likely to be small. But economists estimate that an additional 100,000 housing starts would add about 250,000 new jobs.

Home building has grown for two straight quarters. A report on Monday showed builder optimism scaled a 1-1/2 year high in December, and data later this week is expected to show increases in sales of both previously owned and new homes.

But a full recovery for the sector, which triggered the 2007-09 recession, is likely years away given a glut of unsold homes, weak prices, high unemployment and tight credit. Housing starts remain less than a third of the 2.27 million rate peak reached in January 2006.

It will still take two to three years to work off the excess inventory and housing prices will remain under pressure through the first half of 2012, said Eric Green, chief U.S. economist at TD Securities in New York.

However, residential activity is now in an upswing (and) will contribute modestly to GDP growth in 2012, he said. While this will not drive the recovery, every little bit helps when growth is trending around 2 percent.

Last month, starts of multi-family homes surged 25.3 percent to a 238,000-unit rate, and groundbreaking for projects with five or more units hit the highest level since September 2008.

Single-family home construction -- which accounts for a much larger portion of the market -- rose 2.3 percent to a 447,000-unit pace.

Permits were boosted by a 13.9 percent jump in the multi-family segment. Permits for buildings with five or more units were the highest since October 2008. Permits to build single-family homes rose just 1.6 percent.

(Reporting By Lucia Mutikani; Editing by Dan Grebler)