Other data on Wednesday showed the industrial sector continuing to struggle under the weight of a strong dollar, cutbacks in inventory investment as well as spending cuts by energy firms in response to persistently low oil prices.
Groundbreaking jumped 10.5 percent to a seasonally adjusted annual pace of 1.17 million units last month, the Commerce Department said. Building permits vaulted 11 percent to a 1.29 million-unit rate, the highest since June.
With permits running ahead of starts, home building is likely to remain supported in the months ahead.
The Fed on Wednesday raise its benchmark overnight interest rate by 25 basis points from near zero, the first rate hike in nearly a decade. The U.S. central bank gave an upbeat assessment of the economy and noted that "the housing sector has improved further."
With the Fed making it clear that the tightening cycle is likely to be gradual, the increase in borrowing costs is not expected to derail the housing recovery.
"The interest rate is still low compared to historical standards," said Kevin Young, an analyst at IBISWorld in Los Angeles.
In a separate report, the Fed said industrial production fell 0.6 percent in November as unusually warm weather caused a sharp drop in demand for utilities.
The third straight monthly decline in industrial output also reflected another sharp fall in mining production, driven by a plunge in oil and gas well drilling. Manufacturing output was unchanged. However, motor vehicle production fell for the first time since August, a worrying signal for manufacturing.
"We expect the auto sector to remain a drag on total production in coming months. On balance, manufacturing activity is likely to remain weak as the U.S. economy is still adjusting to the shocks of lower energy prices and weaker foreign demand," said Laura Rosner, an economist at BNP Paribas in New York. U.S. stocks were trading higher, with the S&P homebuilding index <.SPLRCHOME> rallying 1.98 percent. D.R. Horton Inc (>> D.R. Horton, Inc.), the largest U.S. homebuilder, rose more than 2 percent. Lennar Corp (>> Lennar Corporation), the nation's second-largest homebuilder, advanced 1.62 percent. The dollar was flat against a basket of currencies <.DXY>, while prices for U.S. Treasury debt
STRONG HOUSING FUNDAMENTALS
November marked the eighth straight month that housing starts remained above a 1-million unit annual pace, the longest stretch since 2007. Economists expect starts to average around 1.1 million units for 2015, which would be the highest since 2007 and up from 1.0 million in 2014.
Robust household formation as labor market strength encourages young adults to leave their childhood homes is underpinning the housing market recovery.
But the sector remains constrained by a persistent shortage of houses for sale. This has resulted in home prices rising faster than salaries, pushing more people towards renting.
"Tight inventories and high prices will provide the incentives for builders to continue ramping up activity," said Greg Daco, head of U.S. macroeconomics at Oxford Economics in New York.
Single-family housing starts, the largest segment of the market, increased 7.6 percent to a 768,000-unit pace. That was the highest reading since January 2008. Activity was probably also boosted by mild weather. Groundbreaking on single-family projects rose in the South, Northeast and West, but fell in the Midwest.
Starts for the volatile multi-family segment surged 16.4 percent to a 405,000-unit pace. That segment has been the driver of residential construction but a shift towards single-family homes is expected in 2016.
"Homebuilders are making progress addressing the shortage of newer vintage single-family homes we see in many markets, especially affordable housing products with a price of under $200,000," said Tian Liu, chief economist at Genworth Mortgage Insurance in Raleigh, North Carolina.
Permits to build single-family homes increased 1.1 percent last month to the highest since December 2007. Multi-family building permits soared 26.9 percent.
(Reporting by Lucia Mutikani Additional reporting by Megan Cassella; Editing by Paul Simao and James Dalgleish)
By Lucia Mutikani
