The National Association of Home Builders/Wells Fargo builder sentiment index rose in June to 29, the highest reading since May 2007. It increased from a reading of 28 last month, which was revised down one point from its initial figure.
The index, which was released Monday, has risen in seven of the past nine months, suggesting builders are starting to see the seeds of a recovery taking shape after years of stagnation.
Yet, the market has a long way to go. Any reading below 50 indicates negative sentiment about the housing market. The index hasn't reached that level since April 2006, the peak of the housing boom.
In June, builders reported seeing the best sales level since April 2007, according to a separate measure in the survey. Their outlook for sales in the next six months, however, hasn't changed from May.
Cheaper mortgages and lower home prices in many markets have made home buying more attractive. Many economists believe that housing construction could contribute to overall economic growth this year for the first time since 2005.
Sales of both previously occupied homes and new homes rose near two-year highs in April. And builders are breaking ground on more homes and requesting more permits to build single-family homes later this year.
Jennifer Lee, senior economist for BMO Capital Markets, said that June reading on builder sentiment was welcome news. She said even with recent weak readings on employment, builders' outlook for sales over the next six months did not decline and foot traffic remained the same.
Still, the pace of home sales remains well below healthy levels. Economists say it could be years before the market is fully healed.
Many people are still having difficulty qualifying for home loans or can't afford larger down payments required by banks. Some would-be home buyers are holding off because they fear that home prices could keep falling.
The economy is growing only modestly and job creation slowed sharply in April and May. U.S. employers created only 69,000 jobs in May, the fewest in a year.
Though new homes represent less than 20 percent of the housing sales market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to Home Builders' data.
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