U.S. builders started construction last month on the most homes and apartments since July 2008, more evidence that the housing recovery is gaining momentum.

The Commerce Department said Tuesday that builders broke ground on homes in October at a seasonally adjusted annual rate of 894,000. That's a 3.6 per cent gain from September.

Single-family home construction dipped 0.2 per cent to an annual rate of 594,000, down from a four-year high in the previous month.

Apartment construction, which is more volatile from month to month, rose 10 per cent to an annual rate of 285,000.

Applications for building permits, a sign of future construction, fell 2.7 per cent to 866,000, after jumping 12 per cent in September to a four-year high.

Still, permit applications to build single-family homes rose to their highest level since July 2008.

"The overwhelming trend here is a housing market that has clearly shifted into recovery mode," Robert Kavcic, an economist at BMO Capital Markets, said in a note to clients.

Starts still below healthy levels

Housing starts are 87 per cent above the annual rate of 478,000 in April 2009, the recession low. That's still short of the 1.5 million annual rate considered healthy.

Superstorm Sandy had minimal impact on the October figures, the government said. It could delay some construction in November.

Still, residential construction activity in region should get a boost soon after when builders begin replacing homes destroyed by the storm.

The housing market has been making consistent gains this year, helping prop up an economy that's being squeezed by a global slowdown and looming spending cuts and tax increases.

Builder confidence rose to its highest level in six and a half years, according to a survey by the National Association of Home Builders/Wells Fargo. Their index of builder sentiment rose to 46 this month, up from 41 in October.

It was the highest reading since May 2006, just before the housing bubble burst. Readings below 50 signal negative sentiment about the housing market.

The index has been rising since October 2011, when it was 17. It has surged 27 points in the past 12 months, the sharpest annual increase on record.

Existing home sales at 5-year high

Sales of previously occupied homes rose 2.1 per cent to 4.79 million in October, the National Association of Realtors said.

Sales are near their highest level in five years, excluding temporary spikes in 2009 and 2010 when a homebuyer tax credit boosted purchases.

A key factor fueling the gains is a gradually improving economy, which has increased the number of people looking for homes.

At the same time, fewer homes are available for sale. The low supply is helping push up prices. In addition, mortgage rates have hit all-time lows.

And rents are rising, making the purchase of a single-family home or condominium more attractive.

Though new homes represent less than 20 per cent of the housing sales market, they have an outsize impact on the economy.

Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to data from the home builders group.