Demand for new homes may be improving

Builders are more optimistic this month than they have been for five years, and they expect the market for new homes to get even better in the next six months.

The National Association of Home Builders/Wells Fargo Housing Market Index rose in July to its highest level since March 2007, up six points from June. Although the current reading of 35 still puts builders on the glass-half-empty side, the size of the leap was the greatest since September 2002.

A reading of 50 means builders are equally pessimistic and optimistic. The component of the index measuring expectation for new-home sales in the next six months rose 11 points, to 44.

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"Combined with the upward movement we’ve seen in other key housing indicators over the past six months, this report adds to the growing acknowledgement that housing – though still in a fragile stage of recovery – is returning to its more traditional role of leading the economy out of recession,” NAHB chief economist David Crowe said in a news release.   

• A few more housing markets show improvement         
  

The market for new homes is likely benefiting from the shortage of existing homes for sale. The tight inventory has led to price increases in some of the areas that the foreclosure crisis hit hardest, such as Phoenix and Miami.

• Cities growing faster than suburbs
  

"It’s been seven years since this all began to turn down, and you have people that are just ready to move on with their lives, take advantage of great interest rates," said Douglas Yearley, CEO of builder Toll Brothers, in a conference call last week, as Bloomberg reported. "We have all this pent-up demand that has not been in the market. That is coming back out."

The homebuilder index has been published since 1985. Bloomberg notes it averaged 54 between 2002 and 2007, then reached a low of 8 in January 2009.

• Home-price increases may not last
  

Despite the improvement in builder sentiment, the NAHB news release noted several factors holding back recovery: tight credit, problems with appraisals and a shadow inventory of distressed homes that have yet to hit the market.

While some analysts have declared that the housing crisis is over and that the market is back on the upswing, others remain pessimistic. Federal Reserve Board Chairman Ben Bernanke expressed pessimism about the overall economy in a report to Congress today, saying:

"Although declines in energy prices are now providing some support to consumers' purchasing power, households remain concerned about their employment and income prospects and their overall level of confidence remains relatively low."