Home builder confidence soars despite rising rates

Confidence among the nation's home builders in July jumped to the highest level since January of 2006, according to a monthly index from the National Association of Home Builders. This is the third consecutive monthly gain. The index stands at 57. Fifty is the line between positive and negative sentiment.

"Today's report is particularly encouraging in that it shows improvement in builder confidence across every region as well as solid gains in current sales conditions, traffic of prospective buyers and sales expectations for the next six months," noted NAHB Chairman Rick Judson, a home builder from Charlotte, N.C. "This positive momentum could be disrupted by threats on the policy side, particularly with regard to the mortgage interest deduction and federal support for the housing finance system."

All three components of the index rose in July. Current sales conditions rose five points to 60—the highest level since early 2006. The component gauging sales expectations in the next six months gained seven points to 67, and the component gauging traffic of prospective buyers rose five points to 45—marking the strongest readings for each since late 2005.

"Builders are seeing more motivated buyers coming through their doors as the inventory of existing homes for sale continues to tighten," noted NAHB Chief Economist David Crowe. "Meanwhile, as the infrastructure that supplies home building returns, some previously skyrocketing building material costs have begun to soften."Sales of newly built homes rose just over 2 percent from May to June. Single family housing starts were flat. But permits, considered a more reliable indicator, gained 1.3 percent month-to-month.

Home builders have been hampered by a lack of finished lots on which to build, as well as by shortages in skilled labor and building materials. Builders have been raising prices in order to make up for higher costs, and record low interest rates have helped them to be able to do that.

"Builders may be somewhat insulated from rising rates due to price points. New homes typically aren't "entry level" and buyers that qualify can generally weather a .375 percent to .75 percent change in rates without getting declined due to debt-to-income," said Matthew Graham of Mortgage New Daily. "I think the confluence of rising prices and falling rates in the 3.25 percent range is what fueled the frenzy. Now we just have the rising prices part, so all things being equal, it should be cooling down."

By CNBC's Diana Olick. Follow her on Twitter @Diana_Olick.

Questions?Comments? facebook.com/DianaOlickCNBC