By Jeannine Aversa
The Associated Press

WASHINGTON - Residential construction activity picked up in December, helping to make all of 2003 the best year for home builders in a quarter-century and underscoring the critical role the sector played in the economy's resurgence.

The Commerce Department reported Wednesday that housing construction increased by 1.7 percent last month from November - ending 2003 on a high note. For all of last year, the number of housing units that builders broke ground on totaled 1.85 million, up from 1.70 million in 2002.

The total for 2003 marked the strongest performance since 1978, when housing construction came to 2.02 million.

"There is no doubt about it - housing is the shining light in the recovery," said Susan Wachter, a real estate professor at the University of Pennsylvania's Wharton School.

December's performance, meanwhile, was a lot better than analysts expected. They were forecasting an almost 6 percent drop in activity.

The housing market - powered by low interest rates - was one of the main forces supporting the economy last year. The sector's strength contributed to the blistering 8.2 percent growth rate in the economy in the third quarter of 2003 - the best performance in almost two decades.

"The only complaint I heard from builders last year is that they can't get enough land. We only get that complaint when things are really good," said Michael Carliner, economist at the National Association of Home Builders.

Economists think that the housing market probably will slow a bit this year - but still register healthy activity - based on expectations that long-term mortgage rates probably will creep higher later this year.

Rates on benchmark 30-year mortgages sank to a four-decade low of 5.21 percent in the middle of June and have bounced around since then. Last week, rates on these mortgages stood at 5.66 percent, a six-month low.

With signs that the economy is gaining ground, analysts expect Federal Reserve policy-makers to hold short-term interest rates at 1 percent, a 45-year low, when they meet next week.

Some economists believe rates will stay where they are for the rest of this year and into 2005 because inflation is low and the labor markets still need time to heal. Others, however, believe the Fed could start nudging rates up later this year if the economy goes gangbusters.