New housing starts in September came in higher than expected and showed that builders are still getting product started in what many feel is still an under-housed nation.

Mortgage applications also reversed course and headed upward last week.

The Census Department said Wednesday that new housing starts were at a seasonally adjusted annual rate of 2.11 million. Economists had forecast a September rate of 1.975 million new starts.

The September rate is 3.4% above the revised August estimate of 2.04 million, and is 10.3% above the September 2004 rate of 1.91 million. Single-family starts were at a rate of 1.75 million, which is 2.6% above August.

"It just continues to show that the market is chugging along here on the construction side," says Nick Buss, senior vice president with PNC Real Estate Finance. "Obviously we want to see what the sales numbers are next week to make sure there is no divergence. You don't want to see starts numbers jump and sales numbers decline."

Next week, data on new-home sales comes out from the Census Bureau, and data about existing-home sales will be released by the National Association of Realtors.

Also on Wednesday, strong mortgage applications data came out from the Mortgage Bankers Association. The group said its composite index of mortgage loan application volume was 737.5 for the week ended Oct. 14, a 6.1% increase on a seasonally adjusted basis from the week before. The index had been falling since mid-September, and the latest spike could signal a rush for mortgages on fears that rates could soon rise further.

"That may be some of the fence-sitters saying, 'OK, we're hitting that 6% mark, we better get in,'" Buss says.

The average contract interest rate for 30-year fixed-rate mortgages increased to 6.09% from 5.98% one week earlier, with points increasing to 1.29 from 1.22, including the origination fee, for 80% loan-to-value ratio loans, the MBA said.