Confidence among builders about the state of the single-family, new-home market was up for the fifth consecutive month in September, hitting the highest level seen since June 2006, according to the latest reading from the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The index was up three points to a reading of 40.

The seasonally adjusted index is a combination of the scores of its three components, where a reading above 50 indicates that a majority of builders see sales conditions as good rather than poor. While the index failed to meet that tipping point, the component gauging sales prospects in the next six months was up eight points to register a reading of 51. The component measuring current sales conditions gained four points to 42, and the component measuring traffic of prospective buyers was up one point to 31.

Regionally, confidence has improved across the country.

Despite the good news, David Crowe, chief economist at the NAHB, noted warning signs on the horizon. "Against the improving demand for new homes, concerns are now rising about the lack of building lots in certain markets and the rising cost of building materials," he said in the release discussing the numbers. "Given the fragile nature of the housing and economic recovery, these are significant red flags."

While the report of lot shortages is based on anecdotal evidence the NAHB has received from builders' comments, says Bob Denk, an NAHB economist, the rises in materials' costs are documented on the Producer Price Index. "The real culprits are gypsum and lumber and OSB," Denk says. "Those are the things that have really been moving up in the first half of this year."

Compared to the end of 2011, gypsum prices are up 20%, OSB is up 23%, and softwood lumber is 6% higher, due to increased demand at a time when many manufacturers still have facilities mothballed. "They lost economies of scale and are waiting to see a more sustained level of demand before they reenter productive capacity," Denk says. "We heard from gypsum producers late last year that there were going to be significant price hikes effective in 2012, and we've seen more letters making those warnings about 2013." 

See the NAHB’s full release discussing September’s HMI reading.

Claire Easley is a senior editor at Builder.