By Lucia Mutikani
WASHINGTON (Reuters) - U.S. housing starts surged to their highest in nearly six years in November, a sign of strength in the economy that underscores the Federal Reserve's decision to start cutting back its monthly bond purchases.
The Commerce Department said on Wednesday housing starts jumped 22.7 percent, the biggest increase since January 1990, to a seasonally adjusted annual rate of 1.09 million units. That was the highest level since February 2008.
Groundbreaking increased 1.8 percent in October to an 889,000 unit pace.
"The last piece of the economic puzzle is falling into place and the expansion is assured," said Chris Rupkey chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
The U.S. central bank announced at the end of a two-day meeting on Wednesday that it would reduce its monthly $85 billion bond buying program by $10 billion starting in January.
The Fed also said it expected economic growth to pick up and described the risks to the outlook for the economy and the labor market as "having become more nearly balanced.
Stocks on Wall Street rallied, while U.S. Treasury debt prices maintained their earlier losses. The dollar raced to its highest level against the yen in more than five years.
The housing starts data was the latest indication the economy was strengthening, with employment rising solidly in October and November, and retail sales and industrial production exceeding expectations last month.
Economists, who had expected starts to come in at a 950,000-unit rate in November, raised their fourth-quarter gross domestic product estimates by as much as two tenths of a percentage point on Wednesday to as high as a 2.3 percent annualized rate.
A run-up in mortgage rates, in anticipation of the U.S. central bank tapering its monthly bond purchases, took some edge off the housing sector's recovery earlier in the year, but not enough to halt the process as a steady increase in household formation from multi-decade lows props up demand.
The firmer tone appears to have spilled over into December, with a separate report on Wednesday showing the private sector maintained its sturdy growth pace this month, with particularly strong gains in employment.
"The report signals fairly strong activity at the end of 2013 and looks consistent with our view that growth will pick up next year," said Daniel Silver, an economist at JPMorgan in New York.
Global shipping company FedEx Corp (FDX.N) forecast a strong holiday season and full-year 2013 on Wednesday, even as it reported second-quarter earnings that missed Wall Street expectations.
Last month, groundbreaking for single-family homes, the largest segment of the market, soared 20.8 percent to a 727,000-unit pace, the highest level since March 2008.
SINGLE-FAMILY STARTS SURGE
Starts for multi-family homes jumped 26.8 percent to a 364,000-unit rate.
Multi-family starts have risen strongly through the course of the housing recovery, buoyed by demand for rental apartments as still-high unemployment and stringent lending practices by banks priced potential homeowners out of the market.
While permits to build homes fell 3.1 percent in November to a 1.01 million-unit pace, they were above economists' expectations for a 990,000-unit pace. Permits lead starts by at least a month.
The drop in permits last month is likely to be temporary. Homebuilder confidence rose in December, with builders upbeat on current sales conditions, future sales and prospective buyers, a report showed on Tuesday.
"The housing pick-up is sustainable into the first half of 2014," said Jay Morelock, an economist at FTN Financial in New York. "Builders are optimistic about pent-up consumer demand, even in the face of rising rates and stronger prices."
The stock of houses on the market remains lean and the inventory of homes under construction is at a 4-1/2 year low.
In November, permits were weighed down by a 10.8 percent drop in approvals for the multifamily sector. Permits for single-family homes rose 2.1 percent. (Reporting by Lucia Mutikani; Editing by Meredith Mazzilli)