A downturn in housing starts and building permits wasn’t what markets were expecting, but given how well the index had performed in the prior two months, the general trend continues to improve.

Privately-owned housing starts fell 1% to an annual pace of 581,000 in July, against expectations that they would advance 2.3% to 598k. Data from the prior two months was revised downwards slightly.

The report wasn’t just bad news though. The most important component continued on its upward path, as single-family housing starts climbed 1.7% to a rate of 490k ― its highest level since October 2008. So, as with last month, it was multiple-family units that declined, falling 13.3% to 91k in the month after a 26.1% decline in June, putting the index back at April’s level.

“July's level of starts is still 74% below the 2.27 million record ― which was double the rate of household formation ― but is up 21% from April's rain-influenced 479,000 record low,” noted Jennifer Lee from BMO Capital Markets. “In other words, we are heading in the right direction, slowly.”

Since July 2008, the annualized pace of new housing construction as fallen 37.7% from a rate of 933k.

Meanwhile, Building permits fell 1.8% to an annualized pace of 560k in June, which is 39.4% below the July 2008 level. That’s far from good, but the annualized drop in the prior month was -51.4%.

As with housing starts, the losses were in multiple-units. Single-family permits for new houses managed to advance 5.8% in the month to a pace of 458k, but authorizations for multiple-unit residences declined from 137K to 102k.

Taking permits and starts together, Ian Pollick, strategist from TD Securities, said the report could be interpreted in two ways.

“On the optimistic side, it appears that residential construction activity may have stabilized to a degree insofar as the volume of single-family starts is now the highest level since October 2008 combined with the fact that even after the healthy 6.5% M/M gain in June starts only gave back a slight margin,” he said.

“On the other hand, with sales continuing to lag behind the level of building activity by a factor close to 200K (latest data puts the gap at 197K), even though the level of starts declined on the month it does suggest that the inventory of unsold homes could potentially rise higher.”

On the whole, it’s disappointing that starts and permits each fell, but single-family units continue to march forward. Some solace is also provided by the fact that homebuilder sentiment hit a 14-month high in August, as published yesterday by the National Association of Home Builders. The report edged up just one points, but it represents a 23% improvement from last year.