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U.S. housing permits surged faster than expected in July to the highest level this year as falling interest rates helped to make new-home construction more affordable for builders and buyers alike. 

Permits in July jumped by 8.4% from June levels to 1.336 million, well above economists' forecast for an increase of 1.27 million. 

Housing starts, reflecting the actual start of new construction, fell by 4% from June levels  to 1.19 million, an indication of slowness in the housing market prior to the Federal Reserve's recent signals that it was moving to cut U.S. interest rates for the first time in more than a decade. 

The Fed lowered its official rate by 0.25 a percentage point last month to a range between 2% and 2.25%, and most traders and economists expect further reductions later this year.

At the same time, fears of a slowing global economy have sparked demand for U.S. government bonds, pushing down 10-year Treasury yields that many banks use as a benchmark for 30-year mortgages.

The lower borrowing costs are now attracting the attention of homeowners and shoppers.

According to the Mortgage Bankers Association, applications for new home loans surged 22% last week, as refinancing applications surged to their highest in three years.

But many homeowners are staying put in their current residences, limiting the inventory of homes on the market and crimping the pace of existing-home purchases, Fannie Mae Chief Economist Doug Duncan said this week.

So a surge in residential construction could help to provide an additional source of options for home shoppers.