Housing starts and new building permits came in higher than expected in December, rising 4.5% from November but still falling sharply from a year earlier.

Overall housing starts were at a seasonally adjusted annual rate of 1.64 million in the month, above the revised November estimate of 1.57 million, the Commerce Department said Wednesday. The December starts were 18% below the year-earlier level of 2 million.

Economists expected an annualized rate of 1.57 million starts in December.

"The big story here is the weather," says Phillip Neuhart, an economic analyst with Wachovia. "It was really a warm month. It was also a dry month."

Housing starts' typical seasonal adjustment for the month applies whether the weather is good or bad, so the warm temperatures helped juice the December figures, Neuhart says.

December new-housing permits, meanwhile, were at a seasonally adjusted annual rate of 1.6 million, 5.5% above November, but down 24.3% from a year earlier. Economists expected a rate of 1.51 million permits.

The increased permit number could signal that homebuilders are seeing buyer traffic pick up.

"There are still fewer permits than starts, so it's not like pipelines are really getting full," Neuhart says. "It just means that maybe we're seeing some stabilization."

The data came a day after homebuilder Lennar ( LEN) reported a fourth-quarter loss but gave an optimistic 2007 earnings target based on its belief of a stabilizing housing market.

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