In a separate report, the University of Michigan's survey showed consumer sentiment dipped during the first half of August as Americans remain worried about job security. Sentiment has essentially remained flat for three months after bouncing back from lows before the Iraq war.
Yet economists and Federal Reserve officials have said with spending making up a little more than two-thirds of the economy, what matters is whether consumers are opening their wallets when their confidence is shaky.
And so far consumers keep shopping, even through the most widespread power outage in U.S. history. Weekly sales at chain and department stores stayed brisk and suggested retail sales are in for another strong month.
"Don't watch what people say, see what they do. And what they do is really impressive," said Alan Ruskin, research director at 4Cast Ltd. in New York. With the upbeat economic news pouring in during the past two months, economists have busily hiked their expectations for economic growth this quarter to 4 percent or more, a big step up from last quarter's 2.4 percent pace.
"I'd say we're getting somewhat more balanced growth now than we have in a long time. But I still question whether this growth will be sustained a year from now," said Paul Kasriel, chief economist and director of research at Northern Trust in Chicago.
Not only did home builders break new ground at a breakneck speed in July, but housing starts for both May and June were also revised up. That means overall growth for last quarter could be revised higher, setting a stronger trajectory for the economy.
The Commerce Department said housing starts rose 1.5 percent in July to a seasonally adjusted 1.872 million annual rate, the highest since 1986 and easily beating forecasts for a dip to a 1.793 million rate.
Starts of single-family homes came in at the highest since November 1978 at a 1.521 million annual rate. The figures came on the heels of another report showing confidence among homebuilders hitting its highest level in 3-1/2 years in August, even better than throughout the recent boom.
A sharp 1 percentage point jump in 30-year mortgage rates since June has prompted a wave of Americans to buy homes or try to get last minute refinancings before rates head even higher. While higher mortgage rates will slow some of the housing boom, analysts do not see a big reversal.
"There's no doubt it will slow things down in the next three months. But I don't expect to see a sharp downturn in the housing sector," said Ruskin at 4Cast.
The July report did include one cautionary sign. Permits for new homes -- an indicator of future building -- dipped 2.4 percent to a 1.780 million annual pace.