Builder confidence in the market for newly built single-family homes rose four points to a level of 58 on the National Association of Home Builders/Wells Fargo housing market index.

“Growing confidence among consumers is what’s fueling this optimism among builders,” said NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Delaware. “Members in many areas of the country continue to see increasing buyer traffic and signed contracts.”

This comes despite the fact that although housing starts were up in October, the bulk of the activity was in multifamily construction, not single-family homes.

Sterne Agee chief economist Lindsey Piegza urged caution recently.

“Uneven demand is likely to keep home builders cautious for some time, despite the fact that industry confidence is on the rise thanks to relative improvement in conditions compared to weakness at the start of the year,” Piegza said.

Indeed, about two years ago the housing market index began to outpace actual starts, reversing a trend going back to the year 2000, according to the chart below (click to enlarge).

Homebuilder confidence

NAHB feels confident that homebuyer interest will grow.

“Low interest rates, affordable home prices and solid job creation are contributing to a steady housing recovery,” said NAHB chief economist David Crowe. “After a slow start to the year, the HMI has remained above the 50-point benchmark for five consecutive months, and we expect the momentum to continue into 2015.” 

Derived from a monthly survey that NAHB has been conducting for 30 years, the NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.”

Tom Showlater at Digital Risk cautioned on the confidence, though.

"If mortgage applications continue to stagnate at historic lows, the Index will falter," Showalter said.

“All three components of builder sentiment are up including current sales, future sales expectations and crucially, traffic.  Traffic is the most vulnerable in terms of sentiment.  Buyers who may have been motivated by a recent dip in mortgage rates may step back again as rates are expected to increase in coming months. Redfin saw a drop in traffic in October even as rates dropped below 4%,” said Nela Richardson, chief economist for Redfin. “Last month was a real downer in builder confidence as current sales, expectations of future sales and traffic were all down.  In order for a positive uptick over the long term, builder sentiment will have to overcome both supply and demand headwinds.  On the supply side, labor shortages are still impacting sentiment.  Traffic will be a major buy-side factor in sentiment, as the market shakes out just how sensitive buyers are to changes in mortgage rates in the current new home market.”

The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

All three HMI components increased in November.

The index gauging current sales conditions rose five points to 62, while the index measuring expectations for future sales moved up two points to 66 and the index gauging traffic of prospective buyers increased four points to 45.

Looking at the three-month moving averages for regional HMI scores, the Northeast rose three points to 44, the South posted a four-point gain to 62, and the West edged up one point to 58. The Midwest registered a two-point loss to 57.