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.

“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 build materials costs are rising, and this is further squeezing already tight margins.”

Estimates of the 47 economists surveyed by Bloomberg 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.

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.

The confidence survey asks builders to characterize current sales as “good,” “fair” or “poor” and to gauge prospective buyers’ traffic. It also asks participants to gauge the outlook for the next six months.

“It’s worth noting that while some builders have shifted their assessment of market conditions from “poor” to “fair,” relatively few have shifted their assessments from “fair” to “good,” Crowe said in the statement.
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.
Mortgage Rates

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.

Foreclosure filings in the U.S. declined 34 percent in the third quarter from a year earlier as states continued to probe allegations of “robo-signings” in home seizures and lenders verified paperwork, according to RealtyTrac Inc. data released last week.

Default notices rose 14 percent from the second quarter, a sign lenders may be speeding up the repossession process, RealtyTrac said.

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.”
Bernanke’s View

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.

“A number of factors — including the overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and the large number of “underwater” mortgages have left the rate of new home construction at only about one-third of its average level in recent decades,” he said in prepared remarks.

“It is clear that, overall, the recovery from the crisis has been much less robust than we had hoped,” Bernanke said.