In step with other improving housing market fundamentals, confidence among home builders notched up again in December, an industry trade group report showed Tuesday.
The National Association of Home Builders/Wells Fargo Housing Market Index rose 2 points in December, making it the eighth consecutive month of gains and the highest index reading since April 2006.
The overall index, which gauges current sales expectations, future sales expectations, and buyer traffic, now sits at a level of 47. Although readings below 50 generally indicate more pessimistic attitudes among builders about the newly built, single-family market, NAHB Chief Economist David Crowe says the underlying sub-indices have consistently increased in recent months, showing that sentiment is improving.
"Current sales expectations and future expectations have broken 50 and flipped over into more optimism," Crowe says. "This is the fourth consecutive month [those sub-indices have been above 50], so that's a good, solid foundation."
Much of strength seen in builder confidence in recent months has been buoyed by the rising tide of the overall housing market, Crowe says, and the increased number of serious buyers more apt to "pull the trigger" when it comes to buying a home.
Low mortgage rates and rising home prices have also played a role in giving buyers more confidence to take the homeownership plunge. As home prices have ticked up, buyers have become less skittish about potentially buying property that could lose value immediately. Higher prices also motivate buyers to jump on a good deal quickly before prices rise further.
Continued good news from the housing market also has broader implications for the national economic recovery. A struggling housing market has been blamed in the past for stunting economic growth, but the sector is now seen as one of the few bright spots in a recovery still trying to find its feet.
Housing has added to gross domestic product for the past four quarters and the sector is currently growing at three to four times the rate of the economy overall, according to Crowe.
"I'm expecting housing to play its more traditional role of sparking the rest of the economy," Crowe adds.
John Tashjian, principal at New York City-based Centurion Real Estate Partners, points out that builder confidence is a lagging indicator, but agrees the fundamentals are moving in the right direction. "Homebuilding is a critical engine that powers this nation's economy and it appears that this engine is starting to slowly move forward, and that the industry is on the 'right track,'" Tashjian wrote in an E-mail.
But as much as the tide is rising for housing and pulling home-builder confidence with it, tight mortgage credit remains an ever-present obstacle. Only those with the best credit can get mortgages now, and as that pool of buyers dwindles, demand could take a hit and slow the progress of the sector, Crowe warns.
The looming fiscal cliff could also drag down the housing market. If lawmakers fail to come to a compromise, the double whammy of tax hikes and spending cuts would likely plunge the nation into another recession and kill any gains in consumer confidence.
Says Crowe: "There would be a restraint in spending and people would stop buying things like houses."
Meg Handley is a reporter for U.S. News & World Report. You can follow her on Twitter or reach her at email@example.com.