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Builder confidence falls, but expert expects uptick

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Home builders' confidence fell in April for the third month, hurt by concerns over buyer traffic and present sales of single-family homes, according to the National Association of Home Builders/Wells Fargo housing market index.

This was the lowest level in six months, as the overall builder-confidence index decreased from 44 in March to 42 in April. Economists polled by MarketWatch had expected the overall builder-sentiment index to rise to 46 in April. Readings above 50 indicate that more builders see sales conditions as good than poor; the last time the index reached that level was 2006.

"Many builders are expressing frustration over being unable to respond to the rising demand for new homes due to difficulties in obtaining construction credit, overly restrictive mortgage lending rules and construction costs that are increasing at a faster pace than appraised values," said Rick Judson, chairman of the National Association of Home Builders, in prepared remarks.

While interest rates continue to hover near record lows and have supported the housing market's recovery, the latest data on confidence indicate there are demand concerns among home builders. Construction-start levels for single-family homes are far below those typically associated with current builder confidence.

"Over the course of the recession, housing prices have decreased and construction costs have increased to the point where in many places, new construction is not profitable," said Jeffrey Otteau, president of Otteau Valuation Group, in East Brunswick. "It's a challenge for builders to price a home high enough to cover the land acquisition and construction costs and still provide a profit."

Banks have also been reluctant to provide builders with acquisition, development and construction, or ADC, loans — the type of commercial loans most associated with delinquencies. But Otteau said that's starting to change, and with it, builder confidence will rise. He said home prices in New Jersey rose by 2.9 percent in the fourth quarter of 2012 and building permits issued in the state have increased by 39 percent over the past year, indicating that construction activity will increase going forward.

"The housing market has traction, we will start to see higher home prices and more profits, and banks will start lending again," he said. "It's good news, and it will get better from here."

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