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."
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.
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.
"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.