New U.S. home construction unexpectedly surged in August, but a decline in building permits underscores how rising interest rates are continuing to cool overall demand for housing.

Housing starts climbed 12.2% last month to an annual rate of 1.575 million units, according to new Commerce Department data released on Tuesday. That is above Refinitiv economists’ forecast for a pace of 1.445 million units.

The increase stemmed from a jump in multifamily housing construction, evidence that rising borrowing costs combined with steep home prices are pushing potential homebuyers out of the market. 

Applications to build – which measures future construction – slowed to an annual rate of 1.52 million units, which is the lowest since June 2020. 

The data comes one day after the release of the National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market. The gauge fell for the ninth consecutive month to 46, marking the worst stretch for the housing market since the 2008 financial crisis.

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