A contractor moves roofing material on a home under construction at the Toll Brothers Cantera at Gale Ranch housing development in San Ramon, Calif.

U.S. homebuilding surged to more than a 12-year high in August as both single- and multi-family housing construction increased, suggesting that lower mortgage rates were finally providing a boost to the struggling housing market.

Housing starts jumped 12.3% to a seasonally adjusted annual rate of 1.364 million units last month, the highest level since June 2007, the Commerce Department said on Wednesday. Data for July was revised to show homebuilding falling to a pace of 1.215 million units, instead of decreasing at a rate of 1.191 million units as previously reported.

Economists polled by Reuters had forecast housing starts would advance to a pace of 1.250 million units in August. Building permits increased 7.7% to a rate of 1.419 million units in August, the highest level since May 2007.

Housing starts rose 6.6% on a year-on-year basis in August.

The housing market, the most sensitive sector to interest rates, had until now shown few signs of benefiting from the Federal Reserve's monetary policy easing, which has pushed down mortgage rates from last year's multi-year highs.

Economists and builders had blamed the lackluster performance on land and labor shortages. A survey on Tuesday showed confidence among homebuilders edged up in September, with builders reporting solid demand for homes.

Builders, however, said they "continue to grapple with ongoing supply-side challenges that hinder housing affordability, including a shortage of lots and labor."

They also noted that a year-long trade war between the United States and China, which has undercut manufacturing, was "holding back home construction in some parts of the nation."

The 30-year fixed mortgage rate has dropped more than 130 basis points to an average of 3.56%, according to data from mortgage finance agency Freddie Mac. Further declines are likely with the Fed expected to cut interest rates again on Wednesday, to blunt the hit on the economy from the U.S.-China trade tensions.

The U.S. central bank lowered borrowing costs in July for the first time since 2008. Residential investment has contracted for six straight quarters, the longest such stretch since the 2007-2009 recession.

Single-family homebuilding, which accounts for the largest share of the housing market, increased 4.4% to a rate of 919,000 units in August, the highest level since January. Single-family housing starts increased in the West, Midwest and the populous South, but fell in the Northeast.

Permits to build single-family homes vaulted 4.5% to a rate of 866,000 units last month. Permits, however, continued to lag housing starts, suggesting limited scope for a strong rise in single-family homebuilding in the coming months.

Starts for the volatile multi-family housing segment soared 32.8% to a rate of 445,000 units in August, reversing the prior two months' declines. Though rental inflation has slowed in recent months, economists do not expect the trend to continue as rental vacancy rates remain low.

Permits for the construction of multi-family homes increased 13.3% to a rate of 553,000 units last month.