Rise in Homebuilder Sentiment Tops Forecast

Homebuilders in the U.S. were less pessimistic than forecast in October as near record-low borrowing costs and price decreases raised hopes the market will turn for the better over the next six months.

The National Association of Home Builders/Wells Fargo sentiment index climbed to 18, the highest level since May 2010, from 14 in the prior month, data from the Washington-based group showed today. Economists surveyed by Bloomberg News projected the measure would rise to 15, according to the median forecast. Readings below 50 mean more respondents said conditions were poor.

The Federal Reserve’s unconventional measures to boost demand and spur job growth combined with concern over the European debt crises have helped reduce mortgage rates, making buying more affordable. At the same time, the prospect more foreclosures will enter the market and unemployment hovering above 9 percent mean it will take a long time for any recovery to develop.

“The first point to remember is that it’s still exceptionally low,” said Eric Green, chief market economist at TD Securities Inc. in New York, who projected the index would rise to 16, the highest estimate in the Bloomberg survey. “When you have record-low mortgage rates and a massive decline in prices, then this provides a good foundation for a recovery. You are beginning to see some slight turn.” Nonetheless, he said, “we continue to have an enormous inventory overhang that has to be worked off.”

Shares Climb

Builder shares climbed after the report, erasing earlier losses. The Standard & Poor’s Supercomposite Homebuilding Index jumped 5.1 percent to 201.62 at 10:52 a.m. in New York. The S&P 500 Index rose 0.5 percent as Bank of America Corp. swung to third-quarter profit, offsetting disappointing results at International Business Machines Corp.

Another report today showed wholesale prices rose more than forecast in September, boosted by gasoline, food and trucks. The producer price index climbed 0.8 percent, the most in five months, after no change in August, according to figures from the Labor Department.

Estimates for the builder confidence index in the Bloomberg survey of the 47 economists ranged from 14 to 16.

Record Low

The gauge, which was first published in January 1985, reached a record low of 8 in January 2009 and averaged 54 in the five years before the recession began in December 2007.

The four-point gain this month was the biggest since April 2010, when buyers rushed to qualify for a government tax credit that would expire that June.

“Some pockets of recovery are starting to emerge across the country as extremely favorable interest rates and prices catch consumers’ attention,” David Crowe, the builders group’s chief economist, said in a statement. Nonetheless, he said, “builders are facing downward pricing pressures from foreclosed homes at the same time building materials costs are rising, and this is further squeezing already tight margins.”

The builders group’s index of current single-family home sales climbed to 18 in October from 14, the report showed. A measure of sales expectations for the next six months jumped to 24 from 17 in September. The gauge of buyer traffic increased to 14 from 11.

Regional Breakdown

Builders in three of the four regions saw a gain in confidence this month, led by a nine-point surge in the West that took that region’s index to the highest level since August 2007. The Northeast was little changed.

Builders probably began work on more homes in September even as permits may have fallen. Housing starts rose 3.3 percent to a 590,000 pace, economists surveyed by Bloomberg forecast the Commerce Department will report tomorrow. Permits, a sign of future construction, fell 2.4 percent to a 610,000 pace. Home construction totaled 554,000 units in 2009, the lowest since record-keeping began in 1959.

Housing prices keep falling even in the face of near-record low lending rates. The S&P/Case-Shiller index of property values in 20 cities fell 4.1 percent from July 2010, the group said Sept. 27. Prices are 31 percent below their peak in July 2006.

The average rate for a 30-year fixed loan dropped to 4.01 percent, the lowest in records dating back to 1971, in the week ended September 29, according to Freddie Mac.

Improving Demand

Scottsdale, Arizona-based Meritage Homes Corp. (MTH), which builds energy-efficient single-family homes, saw its sales in the quarter ended in September rise from a year earlier even as demand remains at “depressed levels,” executive vice president Brent Anderson said on an Oct. 12 conference call.

“We need to have more people in jobs, good, well-paying, full-time jobs,” he said. “It’s really a matter of confidence.”

Fed Chairman Ben S. Bernanke said Oct. 4 that the central bank was ready to take further steps to boost an economy that he said was “close to faltering.” Speaking before Congress’s Joint Economic Committee, Bernanke said home construction was not aiding the expansion, unlike in prior recoveries.

“The recovery from the crisis has been much less robust than we had hoped,” Bernanke said.

To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net.

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