After a couple of months of indifference, sentiment among home builders is once again improving. The NAHB/Wells Fargo Home Builder Sentiment index improved three points to 44 in May, reversing three months of lower sentiment postings.

Home builders have been fretting recently over higher material, labor, and land costs; a still-restrictive lending environment; and a drop off in buyer traffic. (Interestingly, the accompanying report to the index points out that buyers feel a sense of urgency because of the limited number of new homes for sale.)

The rate of starts has been a source of frustration for many home builders. In fact, new-home starts fell more than forecast in April to a five-month low, indicating a pause in the industry’s progress (though the pause was centered mostly on multi-family units). Starts for the month slumped 16.5%, to an annualized rate of 853,000 units, after being revised higher 1.02 million units in March.

The good news – and this likely why home builder sentiment improved – is that the rate of starts will likely accelerate going forward. Building permits surged to a five-year high, increasing 14.3% in April. This points to stronger building activity as we head into the heart of the spring/summer selling season.

Inventory remains an issue, though, and given the slowdown in builder activity in recent months, that's unlikely to change. But we've noted many times that rising home prices will stimulate additional supply – from both home builders and existing home owners.

Data from the NAR point to some progress on the inventory front. In April, the total number of single-family homes, condos, town homes, and co-ops increased 4.1% month over month to 1.75 million in April. Higher prices are prompting more people to list their home, so the market is making progress, though it still has a lot more progress to make: on an annual basis, inventory is still 13.5% below year-ago levels.

That said, pricing points to higher inventory: Zillow, RealtyTrac, Lending Process, Services, Case-Shiller have all produced data that suggest the rising-price trend is sustainable. The latest data from the FNC Residential Price Index, encompassing 100 major metropolitan markets, also show prices rose 5.5% year over year in March.

To be sure, price trends don't last in perpetuity, but the data suggest the trend will likely hold at least through next year in most major metropolitan markets.

Home prices aren't the only thing on the rise, though. Mortgage rates have been rising too. Over the past three weeks, rates have trended meaningfully higher. Much of the rise is attributed to a strengthening economy and a perception of sustainable job growth. This has caused rates to jump 15 to 20 basis points on many 15- and 30-year lending products.

We don't know if we have a trend in the making; one bad jobs report or another European financial meltdown could drop rates once again, but it's worth noting that when rates fall, they tend not to fall far. They might fall by 20 or 25 basis point, but they show little inclination to go any farther.

So this remains the perfect market in many respects: Affordability remains at a multi-decade high, mortgage rates remain at a multi-decade low, jobs and home prices are trending higher. Waiting simply carries much greater risk commensurate to potential reward these days.

 Courtesy of Jessica Regan.

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