NEW YORK (Reuters) - Shares of major U.S. homebuilders rose on Tuesday on positive housing data, extending a rally that started Monday after the third-biggest builder, Lennar Corp <LEN.N>, reported better-than-expected quarterly results.

On Tuesday, the Commerce Department said August's housing starts increased more than expected to their highest level in four months. Permits rose 1.8 percent from July.

Homebuilders on average were up 1.5 percent, according to the Dow Jones U.S. Home Construction Index <.DJUSHB>, outpacing the broader market as measured by the S&P 500 index, which was flat to slightly down.

Shares of No. 1 homebuilder D.R. Horton Inc <DHI.N> were up 1.7 percent while shares of KB Home <KBH.N> were up 2.6 percent.

(Reporting by Helen Chernikoff, editing by Dave Zimmerman)