Home builder confidence surges despite slower sales

After leaping decisively into positive territory in July, home builder sentiment pulled another surprise in August.

A monthly index from the National Association of Home Builders measuring confidence among single-family home builders rose 2 points to 55; analysts had expected the index to hold unchanged at its July level, after steep drops in new home sales and housing starts from June to July.

A reading above 50 is considered positive sentiment. This is the third-consecutive monthly gain and puts the index at its highest level since January.

"As the employment picture brightens, builders are seeing a noticeable increase in the number of serious buyers entering the market," said NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Delaware. "However, builders still face a number of challenges, including tight credit conditions for borrowers and shortages of finished lots and labor."

Home builder sentiment jumps to 55
Home builder sentiment jumps to 55   

The index has three components: Current sales conditions and expectations for future sales each rose 2 points to 58 and 65, respectively. The component measuring traffic of prospective buyers increased 3 points to 42.

"Factors contributing to this rise include sustained job growth, historically low mortgage rates and affordable home prices, which are helping to unleash pent-up demand." NAHB Chief Economist David Crowe said.

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Regionally, one a three-month running average, the Midwest saw the biggest gain in builder confidence, posting a 7 point increase to 55. The index in the West rose 4 points to 56; the Northeast was up 2 points to 38. In the South, it gained 1 point to 52.

After a strong June and July, August has been a little "off" so far, said Stephen Paul, executive vice-president of Mid-Atlantic home builders in Maryland. He is seeing more buyer interest in smaller homes at lower prices. A steep jump in new and existing homes has pushed a lot of potential buyers to the sidelines, despite low mortgage rates.

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"We introduced a smaller home with a lot of bells and whistles—like a 300 series BMW," Paul said. "It has given us an edge to offer a high quality, smaller sized, more affordable product."

—By CNBC's Diana Olick.