The Commerce Department today reported an unexpected 3% sequential rise in housing starts to 1.229 million in October, driven by a 46.5% increase in new construction of homes with five or more units, which were up to a rate of 312,000. Single-family starts were down 7.3% from September to 884,000.Both numbers were reported on a seasonally adjusted basis.

Compared to October, 2006, all starts were off 16.4% and single family starts were down 25.1%.

The starts data, issued jointly by the Census Bureau and the Department of Housing and Urban Development, was apparently skewed by a big jump in homes with five or more units, which was up 46.5% to a rate of rate of 312,000, up from 201,000 in September, and by homes with between two and four units. In its report, the Commerce Department notes that the sample for this type of housing is not large enough to project a reliable statistic.

Permits were down 6.6% to an annual rate of 1.178 million, with single-family authorizations down 8% to 807,000. On a year-over-year basis, all permits were down 24.5% and single-family permits were down 31% from last October. The October permit rate for units in buildings with five units or more was 247,000.

Completions in October were at an annual rate of 1,436,000, 1.9% above the revised September estimate of 1,409,000 and 25.2% below last October. Single-family completions were at a rate of 1,159,000, 2.8% above September. The October rate for units in buildings with five units or more was 247,000.

Regionally, starts were up 8.5% in the Northeast; up 21.1% in the Midwest; down 4.6% in the South and up 5.8% in the West. Permits were up 2.1% in the Northeast; down 8.8% in the Midwest; down -13.1% in the South and up 4.4% in the West.

Carl Reichardt, home building analyst at Wachovia Capital Markets, said in a research note to investors, "The marked fall in single-family construction activity continues apace in October, but this stiff tonic is what's needed to cure the industry's substantial oversupply problem, in our view...As underscored by yesterday's Housing Market Index (HMI) data, field sentiment among builders remains at an all-time low, and as such, we'd expect to see starts and permits continue to decline, even if sentiment lifts itself out of the dregs modestly. Moreover, with more builders compressing lot supply after having monetized lots in-process, and in some cases seeing negative land residual values (i.e. today's home price does not cover cost to construct, let alone cost to construct + land cost, implying that the market views land values as negative), we expect spec starts to erode relatively sharply in the next 6-12 months as builders hope for business to rebound."