U.S. single-family homebuilding surged in September, though excess supply of new homes and prospective buyers holding out for lower mortgage rates pose a near-term challenge.

Single-family housing starts, which account for the bulk of homebuilding, increased 2.7% to a seasonally adjusted annual rate of 1.027 million units last month, the Commerce Department's Census Bureau said on Friday. Data for August was revised higher to show homebuilding rebounding to a rate of 1.0 million units from the previously reported 992,000-unit pace.

Permits for future construction of single-family housing rose 0.3% to a rate of 970,000 units.

New construction benefited in recent years from a dearth of previously owned houses on the market, but a surge in mortgage rates in the spring sidelined prospective buyers. That pushed the supply of new homes for sale to levels last seen in 2008.

Mortgage rates initially dropped after the Federal Reserve kicked off its policy easing cycle last month. However, they have risen over the past three weeks as solid economic data, including retail sales and annual revisions to national accounts, forced traders to abandon expectations for another 50 basis-point interest rate cut next month.

Potential homebuyers have also been reluctant to wade back into the market, anticipating even lower borrowing costs.

A National Association of Home Builders survey on Thursday showed a moderate improvement in homebuilder sentiment in October. It also showed a slight rise in the share of builders using incentives such as price cuts to attract buyers.

Homebuilding could suffer a temporary setback from Hurricanes Helene and Milton, which devastated Florida and large areas of the U.S. Southeast in late September and early October. But rebuilding after the hurricanes could provide a lift for homebuilding.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)