U.S. housing starts jumped 3.4 percent in September and permits for future groundbreaking surged to a 32-year high, defying forecasts for a slowdown in construction following hurricanes Katrina and Rita, government data showed on Wednesday.

A separate report showed U.S. mortgage applications climbed last week for the first time in a month, even as interest rates on the 30-year home loan hit their highest levels of 2005, while the Federal Reserve said housing demand was cooling in some areas.

The Commerce Department said housing starts increased to a 2.108 million unit annual rate in September, as construction on both single-family and multifamily units rose. That outpaced August's upwardly revised 2.038 million unit rate, which was originally reported at 2.009 million units.

Economists had expected starts to slow to a 1.970 million unit annual pace, saying activity likely fell after the storms disrupted construction in the Gulf Coast region.

The Commerce Department said the hurricanes had a minimal impact on housing starts in September. After imputing data for August, it assumed no permits were issued for the about 24 jurisdictions that did not report September data for the department's sample survey.

"It continues to defy all the expectations of doom in the housing market," said Mark Vitner, senior economist at Wachovia Securities in Charlotte, North Carolina. "Demand for housing still remains quite strong and this year will be a record year for single-family construction."

U.S. Treasury debt prices closed higher on Wednesday as traders looked past the housing starts data and deemed selling over recent months has pushed yields high enough to reflect expected interest rate rises ahead.

The dollar ended the day lower on investor sentiment that at least two more interest rates hikes have already been priced into the U.S. currency. Major U.S. stock indexes rose on buoyant quarterly earnings and lower crude oil prices.

SIGNS OF COOLING

A Federal Reserve report released Wednesday afternoon tempered the housing starts data somewhat, suggesting housing demand slowed over the last month in some regions while demand for commercial real estate rose.

The Fed's "beige book" summary of economic conditions, named for the color of its cover, said U.S. business activity increased across the country in September and early October, but hurricane damage weighed on some regions as high energy costs pushed up prices.

Several regions also reported input cost increases being passed through to retail prices, the Fed said, raising fears of broader inflationary pressures in the wake of Hurricanes Rita and Katrina.

Low mortgage rates have supported the housing sector for more than four years. Some economists have predicted a cooling in 2006 as long-term interest rates rise and dampen demand.

But earlier Wednesday, the Mortgage Bankers Association said its index of mortgage loan application volume increased 6.1 percent to 737.5 last week despite an increase in borrowing costs on 30-year fixed-rate mortgages to 6.09 percent.

The 30-year fixed rate, the industry benchmark, has been climbing on and off since late June's level of 5.47 percent, its lowest in 2005. It also is substantially higher than the year-ago level of 5.64 percent.

In its housing starts report, the Commerce Department said total single-family housing starts rose 2.6 percent to a 1.747 million unit rate while multifamily starts soared 7.8 percent to a 361,000 unit pace in September.

Permits for future groundbreaking, an indicator of builder confidence, jumped 2.4 percent to a 2.189 million unit pace -- the highest rate since a matching pace in February 1973.

Wednesday's robust data came on the heels of other signs of strength in the housing sector.

U.S. home builder sentiment rose in October for the first time in four months, the National Association of Home Builders reported on Tuesday, returning to levels reached prior to hurricanes Katrina and Rita.

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