Home Builders are a lot more optimistic these days. In fact, the latest home builder sentiment index posted at 41 for October – the highest posting in nearly six years.

More interested buyers are driving optimism. The traffic component of the home builder index jumped sharply this month, posting at 35 – the highest level since the boom days of 2006.

Rising builder optimism coupled with rising buyer demand is spurring a surge in building activity. September home starts rose strongly to an annual rate of 872,000 units. This is a 16.3% increase over the annual rate posted in August. The multifamily component spiked 25.1%, but the more important single-family component was up 11%, which means it has recovered to mid-2008 levels.

The good news is the housing market is much healthier today than it was in 2008. Back then, we suspected the market was worsening, but we didn't realize how bad it would get. Going from a top to a bottom is painful, because expectations are much higher at a top than at a bottom. Going from a bottom to a top tends not to arouse much emotion, but it does tend to be very remunerative over the long term.

Today, the market is firming up nicely; mainly because we are aware of the issues and dealing with them rationally.

Distressed properties is one of those issues. We've spoken at length on the shift to short sales from foreclosures. Calculatedriskblog.com reports on how dramatic the shift has been. In Las Vegas, short sales are now three times foreclosures. In Phoenix and Sacramento, short sales outpace foreclosures by a two-to-one margin. Moreover, the overall percentage of distressed sales is down year over year in most major markets.

That said, inventory could be the sand that grinds the recovery gears. Existing home sales have been hindered in recent months due to lack of inventory. (Hard to believe that most pundits were forecasting that too much inventory would be an issue in 2012.) For-sale inventories declined on a year-over-year basis in 143 of the 146 markets tracked by Realtor.com. Fifty two cities saw year-over-year declines greater than 20%.

We don't expect inventory to be a lasting issue, though. As home prices continue to rise, more inventory will be drawn into the market.

Falling mortgage lending rates have also contributed to rising home-buyer interest. It's no coincidence that purchase applications have moved inversely with lending rates: as lending rates have fallen, purchase applications have risen. As long as the Federal Reserve continues to buy mortgage-backed securities, lending rates should continue to hold today's low levels.

Courtesy of Jessica Regan.

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