Builder Confidence Blooms to 5-Year High in August

Builders are more confident in prospective sales, but will inaccurate appraisals sink their good cheer?

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Confidence among America's homebuilders shot up to a five-year high in August, thanks in part to a burgeoning recovery in property values across the nation, with builders reporting current prospective sales conditions the best since the housing market tanked.

The National Association of Home Builders/Wells Fargo builder sentiment index was released Wednesday, inching up two points in August to 37, up from 35 in July, making August's numbers the fourth consecutive increase and the highest reading since February 2007.

The turnaround in home prices, which saw a more than 2 percent increase last month, has ignited hopes the housing market is finally turning around and has a lot to do with the boost in builder confidence, says Dave Crowe, NAHB's chief economist.

"[Falling prices] weigh on consumer confidence and by transmission builder confidence," he says. "The recent direction of home prices is an important turning point. It's bringing back the consumer who feared if they purchased a home, it would fall in value."

[Home Prices Rise 2.2 Percent in May]

Industry observers will have to wait until Thursday when the Census releases its monthly housing starts numbers to see if the steady growth in builder confidence has translated into more construction and more lifeblood for the market.

Though many experts remain cautious, Crowe says there's reason to be confident that the current attitude among builders will persist.

"I expect to see some continued modest improvement in [builder confidence] and housing starts," he says. "We continue to see the right kind of conditions for housing improvements."

That doesn't mean, however, that the path to a steady housing market isn't fraught with obstacles and potential setbacks. One of the thornier issues that continues to needle both homeowners and would-be buyers is the appraisal process.

With the onslaught of foreclosures peppering neighborhoods across the country, getting a true estimate of a home's value has never been more difficult, experts say, especially when appraisals rely on the value or sale price of surrounding homes, many of which could be deeply discounted foreclosures.

[Average Closing Costs Dip Nationwide]

This is particularly damaging to home builders. For starters, there have been fewer new homes built over the past several years for appraisers to compare new constructions to and builders have less flexibility when it comes to negotiating price.

"Appraisals continue to be an issue for home builders whose price has a bottom to it," Crowe says. "Unlike an existing home where the only limit might be the mortgage balance, with new homes that flexibility has a floor to it—how much it costs to build [the new home]."

The appraisal issue together with a host of other issues including access to credit—for both builders and potential buyers—and the inventory of distressed homes for sale, keeps the housing market on a fragile, if improving, footing.