New US home construction unexpectedly picked up in October, indicating builders continue to benefit from a limited supply in the resale market.

Residential starts increased 1.9% last month to a 1.37 million annualized rate, the highest in three months, government data showed Friday. Construction of single-family houses edged up 0.2%, also to the highest level since July.

Applications to build — a proxy for future construction — rose to 1.49 million. Permits to build one-family homes increased to the highest level since May 2022, while multifamily authorizations also rose.

While elevated financing costs and stubborn prices continue to take a toll on demand, limited listings of previously owned homes are steering buyers toward new construction. Against a backdrop of higher mortgage rates, builders have been offering cheaper financing rates and other incentives to entice prospective buyers.

Sales of new homes are largely on the rise, and homebuilder shares have recently surged as traders see lower borrowing costs on the horizon.

“Builders are generally looking beyond the near-term and are well aware that there is a structural shortage of housing in the US,” Stephen Stanley, chief US economist at Santander US Capital Markets, said in a note. “Thus, despite rising financing costs, they are likely to want to maintain a certain pace of output regardless of how soft demand gets in the near term.”

The advance in starts reflected a 12.5% jump in the West and a 28.4% surge in the Midwest. New construction in the Northeast fell to the lowest level in more than two years. In the South, the largest US region, starts were the weakest this year.

Data on new-home sales, due later this month, will provide further clues on the outlook for the US housing market.

(Adds economist’s comment)