Builder Confidence Jumps to 6-Year High

Home builders are more optimistic, but few lots and rising materials costs are red flags.

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Bulldozer dumping dirt on construction site

The housing market is continuing its slow trudge up from the depths of the housing bust with news Tuesday that confidence among home builders rose again for the fifth month in a row, beating out economists' estimates.

Builder confidence rose to 40 on the National Association of Home Builders/Wells Fargo Housing Market Index, a 3 point jump from August and the highest reading since June 2006. While a level of 40 still indicates that more builders are bearish on the housing market than bullish, NAHB Chief Economist David Crowe says the general direction of the index is more important.

"The most encouraging fact is the continued rise in optimism that really started a year ago," Crowe says. "Builders feel [that] solid buyers are in the market and are ready to pull the trigger."

But even with pent-up buyer demand starting to reignite activity in the building industry, builders still have numerous hurdles to overcome, not least of which is finding a place to break ground on a new home.

After new home construction ground to a halt following the housing bust, builders were slow to develop lots due to uncertainty about when the housing recovery would take hold and difficulty accessing credit. The pipeline of lots primed to build on more or less dried up, Crowe says, and turning the spigot on again takes time.

In the near term, a dearth of available lots coupled with rising material costs could keep home building more muted that the confidence numbers would indicate.

"I think even with the steady increase in optimism, the actual production will still be modest," Crowe says. "These constraints—credit, appraisals, foreclosures—will continue to dampen the builder's ability to perform at as high a level as their optimism suggests."

Still, the recent steady upward direction of builder confidence has Crowe feeling confident himself that the U.S. construction industry could be on the cusp of a stronger resurgence.

"Builders across the country are expressing a more positive outlook on current sales conditions, future sales prospects and the amount of consumer traffic they are seeing through model homes than they have in five years," he says.

Meg Handley is a reporter for U.S. News & World Report. You can reach her at mhandley@usnews.com and follow her on Twitter at @mmhandley.