New US home construction rose unexpectedly in August, though the slowest pace of building permits in more than two years underscores how higher mortgage rates are weighing on demand.

Residential starts increased 12.2% last month to a 1.58 million annualized rate, led by a jump in multifamily projects, according to government data released Tuesday. The pace of starts topped all estimates in a Bloomberg survey of economists.

Applications to build, a proxy for future construction, declined to an annualized 1.52 million units, the fewest since June 2020.