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October homebuilder optimism at highest level in a year

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WASHINGTON -- An index of optimism among U.S. homebuilders soared in October as mortgage rates hovered near a four-decade low, increasing the likelihood that construction will bolster economic growth.

The National Association of Home Builders (NAHB) said its measure of confidence in demand for single-family houses climbed to 72 this month, the highest in a year, from 67 in September. A gauge of market expectations for the next six months rose to the highest since 1999.

Record-high oil prices and signs of a weakening labor market pushed longer-term interest rates down, starting in July. The benchmark 30-year mortgage rate may average 5.88 percent for the year, the second lowest since 1965, according to Fannie Mae (NYSE: FNM), the largest buyer of U.S. mortgages.

Homebuyers "see this very much as a window of opportunity," Michael Carliner, an economist for the homebuilders' group, said in an interview. Mortgage rates "haven't gone up as much as expected. In fact, they've gone down, and there is the expectation among buyers that they will rise."

Builders are likely to start work on 1.94 million new housing units this year, a 26-year high, according to a forecast this month from the National Association of Realtors (NAR).

Economists expected the builders' index to hold this month at 68, the number previously reported for September. The 15 forecasts in a survey by Bloomberg News ranged from 67 to 71. This month's reading is the highest since the index also was 72 in October 2003.

The association's gauge of sales expectations for the next six months rose to 84 from 75, for the highest reading since November 1999, when it was also 84. The increase was the largest since a 12-point jump in March 1991.

Carliner said the increase in the expectations index shouldn't be overplayed. "We have a certain amount of noise in the number," he said. "It tends to be very volatile."

The average rate on a 30-year fixed mortgage fell to 5.74 percent last week, according to Freddie Mac (NYSE: FRE), the No. 2 purchaser of home loans. The rate has remained lower than 6 percent since the end of July, even as the Federal Reserve increased its benchmark lending rate.

At the current 30-year mortgage, borrowing costs on a $100,000 loan would be $582.94. That compares with $549.73, when rates were at a four-decade low of 5.21 percent in June 2003.

A gauge of buyer traffic in the homebuilders' survey rose to 54 this month from 52 in September. The measure of current sales increased 5 points to 78.

Readings higher than 50 mean more builders view conditions as good than poor. The group's optimism index has exceeded 60 for 17 months in a row, the longest run since 28 months from February 1998 to May 2000.

One reason for caution is that mortgage applications don't always reflect the same level of optimism. The Mortgage Bankers Association's (MBA) index of applications for mortgages to purchase homes has fallen 7 percent this month, suggesting the pool of eligible home buyers may be becoming more shallow.

The Commerce Department may report tomorrow that builders broke ground on 1.95 million new, single-family homes at an annual rate last month, the median of 61 economists' forecasts, down from 2 million a month earlier. Some of the decline in starts may be a result of hurricanes that stalled work in the Southeast, economists said.

"The overall trend is good," in housing, Glenn Haberbush, an economist at Mizuho Securities USA Inc. in New York, said.

The NAR forecast this month that combined sales of new and previously owned homes will climb to a record 7.64 million this year.

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