"Boom would be the most appropriate word for these housing numbers," said Patrick Fearon, economist at A.G. Edwards and Sons in St. Louis.
Wall Street economists had expected housing starts to decrease 4.3 percent to a 1.917 million unit rate from the 2.004 million unit rate initially reported for December.
The report follows a series of US data showing solid economic growth, meaning the Federal Reserve has little reason to shift from its current stance of raising interest rates at a "measured pace".
Low mortgage rates have been supporting the housing sector despite short-term interest rate increases by the US Federal Reserve. Rates on 30-year mortgages averaged 5.57 percent in the week ended February 10, and 5.8 percent for all of 2004, according to mortgage funder Freddie Mac.
In fact, interest rates on 30-year fixed-rate mortgages have not risen above 6 percent in at least six months, helping to keep the housing market hot, said Freddie Mac's chief economist. Freddie expects long-term mortgage rates to average about 6 percent for the full year while the National Association of Realtors has pegged long-term rates at 6.7 percent by the end of 2005.
Separately, the Mortgage Bankers Association said applications for US home mortgages decreased slightly last week as a drop in home purchasing activity offset an uptick in refinancing.
The industry group said its seasonally adjusted index of mortgage application activity decreased 0.5 percent to 732.3 in the week ended February 11, after rising 4.2 percent in the MBA's prior week survey.
Fixed 30-year mortgage rates averaged 5.50 percent last week, excluding fees, up 2 basis points from 5.48 percent the previous week.
Despite the slight increase, mortgage rates remain historically low, which continues to encourage US consumers to refinance their existing home loans.
The MBA's seasonally adjusted index of refinancing applications climbed 4.1 percent to 2,530.1, adding to the 7.8 percent gain the prior week. It marked the fourth gain in the past five weeks.
That is also the highest level for refinancings since the week ended April 16, 2004 when the index reached 2,550.3.
INDUSTRIAL PRODUCTION FLAT: US industrial production was flat in January as warm weather dampened demand for heating, but manufacturing output remained healthy, a government report showed on Wednesday.
The Federal Reserve said relatively warm January weather contributed to a 3.0 percent drop in utilities' output, which dragged overall industrial production lower. Mining output declined 0.3 percent in the month.
Output at factories, the largest component of industrial production, rose 0.4 percent in January, matching its December gain. Manufacturing capacity use rose to 78.0 percent, the highest rate since December 2000.
Overall capacity utilization fell to 79.0 percent from 79.1 percent in December, reflecting weaker readings in both mining and utilities.