Homebuilder Confidence Still High but Buyer Optimism Wanes

NEW YORK (TheStreet) -- Homebuilder confidence remained high in September but signs of waning interest from homebuyers are a cause for concern.

The National Association of Homebuilders/Wells Fargo Housing Market Index, which measures builder confidence in the market for newly built single-family homes, had a reading of 58 in September, unchanged from the previous month. [Read: Ex-JPMorgan Traders Could Face 20 Years in Prison]

The index gauges builder perceptions of current single-family home sales and sales expectations in the next six months as well as their perceptions of traffic of prospective buyers.

A reading over 50 indicates that more builders view conditions as good rather than poor. While builder confidence has remained steady, many are reporting hesitancy on the part of buyers due to the sharp increase in mortgage rates. "Following a solid run-up in builder confidence over the past year, we are seeing a pause in the momentum as consumers wait to see where interest rates settle and as the headwinds of tight credit, shrinking supplies of lots for development and increasing labor costs continue," noted NAHB Chief Economist David Crowe. On Wednesday, the Census Bureau will release housing starts data. Homebuilders are expected to have begun construction on 915,000 homes on an annualized, seasonally adjusted basis in September, according to economists polled by Bloomberg. Builders have actually been slow to ramp up construction despite a shortage of inventory in the market. With the high cost of land, materials and labor, and tight credit conditions, builders have chosen to keep inventory lean and raise prices to boost their margins. But with buyer demand waning, homebuilders may have to reconsider their recent price hikes. [Read: Investment Ideas From Day 1 of the NY Value Investing Congress] Meanwhile, construction activity still is well below normal, according to Trulia's Jed Kolko. That's because the vacancy rate nationally is 10.3%, close to its recession-era peak. There isn't a shortage of housing, just a shortage of homes for sale. Also, household formation at the rate of 746,000 annually is also half of what is considered normal. Household formation and construction won't go back to normal unless the jobs market booms and young adults begin to re-enter the housing market.

Housing has recovered over the past year on low rates and a sharp decline in inventory. With higher rates and increasing inventory, home price gains are expected to slow.

For the recovery to continue, the economy has to continue to expand and create more jobs, or in the absence of that credit would have to loosen.

-- Written by Shanthi Bharatwaj New York.

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