NEW YORK (TheStreet) -- Homebuilders began construction on 9.3% more homes in November, beating economists' expectations.

The Commerce Department said early Tuesday that housing starts came in at a seasonally adjusted annual rate of 685,000 in November, after a revised 627,000 in the prior month. Economists had anticipated housing starts to rise to 630,000 after the originally reported 628,000 in October.

Meanwhile, applications for building permits rose 5.7% to 681,000, after a rate of 644,000 in October. Economists had expected a drop to 635,000 after the originally estimated 653,000 in October, according to Thomson Reuters.

"The better-than-expected gain is mostly in the multi-family sector, which is notoriously volatile and generally something to dismiss," wrote David Ader, market strategist with CRT Capital, in a research note. "It's possible this reflects an increase in rental demand...

it's not good news for single family home prices.

"In the multi-family sector, the upward trend began to emerge as long ago as the first half of 2010 and has continued steadily since," explained Ian Sheperdson, chief U.S. economist with High Frequency Economics, before the government report. The uptick in the single-family sector, he said, is a relatively recent phenomenon by comparison."

"This is not so hard to understand because the collapse of the housing market and the tightening of mortgage lending conditions have pushed large numbers of people into renting who would under normal circumstances have preferred to buy a home."

Housing starts have trended up for two consecutive months after declining from July through September. "Overall starts are now well off their low by nearly 44%, however the headline figure remains considerably below pre-crisis levels (the peak was 2.2 million starts in January 2006)," wrote Dan Greenhaus, chief global strategist with BTIG.

On Monday, homebuilder sentiment improved for a third consecutive month in December, according to the National Association of Home Builders. The NAHB/Wells Fargo index rose 2 points to a reading of 21 from a downwardly revised 19 in November.

Economists were pleasantly surprised by yesterday's housing data even though the market reaction was muted. "We cannot ignore the third straight gain in the NAHB index, taking it almost back to its post-Lehman peak, but achieved this time without the assistance of the homebuyer tax credit," wrote Sheperdson.

"Builder sentiment is improving in line with the increase in starts," wrote Greenhaus of BTIG.

Although a jump in multi-family activity was the main reason behind today's stronger than expected housing starts figures, the report still brings a small boost to U.S. economy.

"It does suggest that residential investment will make a small positive contribution to fourth quarter gross domestic product growth," said a Barclays Capital report. "Our tracking estimate now stands at 3.4%, up from 3.3% previously."

Improvements in homebuilding and sentiment are both indications that the housing market is bottoming out and perhaps headed for a recovery in the long term. However, economists say these are only baby steps in the long path toward a healthy housing sector.

"That does not mean prices may not fall further and it does not mean its all smooth sailing from here," wrote Greenhaus. "But generally speaking, the housing sector is performing okay of late. Given how badly it had been doing, we'll take what we can get."

-- Written by Chao Deng in New York

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