Updated from 11:06 a.m. EDT

The economic news had a familiar ring Tuesday, with data showing the real-estate market continuing to hum while consumers remain restive.

The Commerce Department said housing starts rose to their highest level in 17 years last month, reflecting enthusiasm for low mortgage rates that look increasingly endangered after the selloff in the bond market. But building permits, which indicate future construction, came in lower than economists had forecast.

Meanwhile, the University of Michigan said its preliminary consumer sentiment index for August dipped to 90.2 from 90.9 in July, reflecting weakness in respondents' assessment of their current economic situation. With few signs the job market is bouncing back, economists said the weakness comes as little surprise, even though the average estimate was for a rise to 91.5.

On an annualized basis, construction began on 1.872 million homes last month, a rise from June's revised 1.845 million and the strongest since April 1986. Economists had expected the figure to drop to 1.790 million.

"This just confirms the housing market shows no signs of letting up," said Bill Natcher, senior economist, National City Corp. "Demand for housing is still strong and the very attractive rates are keeping buyers in, with supply responding to that."

Home buyers rushed to lock in historically low mortgage rates in June, before the rise in Treasury yields in July forced interest rates higher. The 30-year fixed mortgage rate reached a record low of 5.11% in June, and has since risen to 6.07%, according to Bankrate.com.

Joel Naroff, senior economist at Naroff Economic Advisors, noted: "Starts are a result of purchases already made, and the typical reaction on the part of buyers when dealing with mortgage rates is to move before they get too high, to make the purchase while they can still afford it."

The latest increase in mortgage rates is a reflection of the rise in the 10-year Treasury note yields as investors anticipate an economic recovery coupled with stronger inflation in the U.S. The 10-year note was recently up 18/32 to 98 29/32, with the yield falling to 4.25%.

The Commerce Department noted that building permits, which signal future production, fell to 1.780 million, below expectations of a decline to 1.803 million, from June's revised 1.823 million.

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"We're pretty much maxed out as far as housing goes," Naroff said. "I don't expect housing to soften a whole lot in September, but in October and November we will start seeing some consolidation."

To that, Natcher responded: "No doubt demand for housing is sensitive to rates, but at these rates, it's not an issue. We're at the initial stages of a nice economic recovery, and improvement in incomes will compensate higher interest rates on mortgages. So I don't expect any type of dramatic pullback in housing."

The recent rise in mortgage rates was also one of the reasons behind the drop in consumer sentiment in August. Along with continued layoffs, the surge of more than a full percentage point in interest rates led consumers to curb economic expectations.

The Michigan index corroborated the decline in the Conference Board's consumer confidence index, which plunged to 76.6 in July from 83.5 the previous month.

But economists seemed unconcerned about the future implications of the fall.

"The decline was marginal, and the numbers held on to most of the increase since March," said Jim O'Sullivan, U.S. economist at UBS Warburg. "The consumer is still strong, and spending figures are looking better."

Both the Michigan index and the Conference Board figures rose sharply after the end of the Iraq war. They have curbed gains since then, amid job concerns. U.S. companies cut 44,000 workers in July, the sixth decline in payrolls in a row, even though the U.S. jobless rate fell to 6.2% in the month, from a high of 6.4% in June.

However, spending has remained resilient: personal consumption has risen every month since March and is projected to have grown 0.6% in July.

O'Sullivan noted: "June and July retail sales are in boom territory, so there's no reason why spending can't hold on to the current trend." Retail sales rose 0.9% in June and 1.4% in July.

"The key here is that there have been some signs the job market is improving, and the economic recovery will hopefully translate into a pick up in hiring," said O'Sullivan, who predicts the U.S. economy will grow at a 4.5% annual rate in the third quarter and 3.5% in the fourth quarter.