July 17 (Bloomberg) -- Housing starts in the U.S. unexpectedly rose in June as construction of single-family dwellings jumped by the most since 2004, signaling the market is stabilizing even as unemployment worsens.

The 3.6 percent increase brought starts to an annual rate of 582,000, the highest level since November and followed a 562,000 pace in May that was higher than previously estimated, the Commerce Department said today in Washington. A report from the Labor Department showed Georgia and Alabama became the latest states where joblessness topped 10 percent.

The construction figures are the latest evidence that the meltdown in the housing market that triggered the financial crisis is nearing an end. Builder shares climbed for a fifth consecutive day, helping to limit stocks losses on disappointing news from General Electric Co. and Google Inc.

“Builders are beginning to see some opportunities to get back to work,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. While a strong rebound is “not likely for some time,” Vitner said, “it seems clear that housing starts bottomed in the first quarter.”

Economists forecast starts would fall to a 530,000 pace, from a previously reported 532,000 in May, according to the median of 73 forecasts in a Bloomberg News survey. Last month’s reading exceeded the highest estimate, with projections ranging from 479,000 to 564,000.

Market Reaction

Treasury securities dropped after the report, while stocks were little changed. The yield on the benchmark 10-year note was 3.65 percent at 4:22 p.m. in New York, up from 3.57 percent late yesterday. The Standard & Poor’s 500 Index closed at 940.4. The S&P builder supercomposite index ended up 1.7 percent.

The Commerce report showed building permits, a sign of future construction, climbed 8.7 percent to a 563,000 annual rate, the highest level of the year.

Construction of single-family homes jumped 14 percent, the biggest gain since December 2004, to a 470,000 rate. The fourth consecutive increase brought single-family starts to the highest level since October. Work on multifamily homes, such as townhouses and apartment buildings, dropped 26 percent after surging 66 percent in May.

The report “quite potentially is signaling the early stages of a rebound,” said Richard DeKaser, chief economist at Woodley Park Research in Washington, whose starts forecast was the highest among economists surveyed. “I think a stabilization would be more assured.”

Mounting Evidence

The increase in starts adds to signs that the housing slump may be nearing a bottom. Combined sales of existing and new homes climbed to a 5.1 million annual rate in May, the highest level so far this year.

U.S. homebuilders are becoming less gloomy about the industry. The National Association of Home Builders/Wells Fargo index of builder confidence gained to 17 in July, the highest level in 10 months, the group said yesterday. Measures of current single-family sales and buyer traffic increased.

Some Federal Reserve officials last month saw a danger of a renewed decline in the housing market, partly as mortgage rates increased. They also pointed to the continuing “high rate” of foreclosures as a risk that inventories could rise and prices fall further.

Housing ‘Vulnerable’

“Most participants viewed the sector as still vulnerable to further weakness,” the central bank said in minutes of the Federal Open Market Committee’s June 23-24 meeting released July 15 in Washington.

Borrowing costs have retreated once again since the Fed’s meeting. The rate on a 30-year fixed loan fell to 5.14 percent in the week ended yesterday, the lowest level in almost two months, according to figures from Freddie Mac. The rate reached a record low of 4.78 percent in late April.

Mounting loan defaults are a concern. Foreclosures rose 33.2 percent in June from a year earlier, RealtyTrac Inc. said yesterday. Also, a record 1.5 million properties received a default or auction notice or were seized by banks in the first half of the year.

One reason more Americans are losing their homes is that increases in unemployment are spreading. Six states posted record unemployment rates in June, while Michigan became the first to top 15 percent in a quarter century, the report from Labor showed. The total number of states with at least 10 percent joblessness rose to 15.

KB Home, the Los Angeles-based homebuilder that targets first-time buyers, is among construction companies seeing improvement, even as unemployment climbs.

“Although key economic indicators remain mixed, we are beginning to see signs that some negative housing market trends may be moderating,” KB Home Chief Executive Officer Jeffrey Mezger said in a statement June 26. While net orders for the second-quarter trailed the same period a year earlier, they were 59 percent higher than the first three months of 2009.

To contact the reporters on this story: Courtney Schlisserman in the Washington newsroom cschlisserma@bloomberg.net; Shobhana Chandra in the Washington newsroom schandra1@bloomberg.net

Last Updated: July 17, 2009 16:25 EDT