Government report shows better-than-expected increase in starts last month. NEW YORK (CNNMoney.com) -- New home building increased in August, a government report said Thursday, further signaling that home builders are regaining their confidence in the housing market recovery. The Census Bureau reported Thursday that builders broke ground for 598,000 new homes during August, up 1.5% from a revised 589,000 in July. That was considerably higher than industry experts were predicting: The consensus analyst forecast compiled by Briefing.com was for 583,000 new starts. Building permits rose 2.7% to 579,000 from a revised 564,000 in July. On Wednesday, the National Association of Home Builders reported their index of homebuilder confidence had risen a point to 19, its highest level since May 2008. Helping to boost demand for new homes has been the first-time homebuyer tax credit, which has enabled many builders to reduce their inventories of unsold homes. "Many builders have not only reduced excess inventory, but now are actually reporting such low inventory that they need to start more homes to replace those they've just sold," said Brad Hunter, chief economist for Metrostudy, a real estate analytics firm. Both starts and permits are still well off from their levels of a year ago. The number of starts is down 29.6% from 849,000 last August, and permits dropped 32.4% from 857,000 last year. The housing starts report was the latest in a series of releases that indicate that the market may have bottomed. These include improvement in new home sales, existing home sales and housing prices. There are some clouds on the horizon. Foreclosures continue to trouble many markets; another 76,000 homes were repossessed by banks in August. That was actually an improvement over recent months, but the expectation is that the rate of foreclosures will begin rising again. That's because a great number of non-conventional mortgage loans, including interest-only mortgages and option ARMS, will reset over the next year or so, yielding substantial increases in the monthly mortgage payments for homeowners. Many people will not be able to afford the increases. With interest-only loans, homeowners pay just the interest for a fixed number of months, usually 60, before they have to start paying off the mortgage at fully amortizing rates. There was an explosion of these mortgages issued in 2005, so many will reset in 2010. Option ARMs are loans in which borrowers are permitted to make minimum payments every month, payments that are less than their monthly interest charges. Many borrowers use that option for as long as they can, but once the mortgage balance reaches between 110% and 125% of the original loan balance, the loans reset into a fully amortizing mortgage -- and payments rise steeply since the balances themselves have also gone up. Real estate analysts predict a spike in these resetting loans, which might force another wave of homeowners into foreclosure. The fear is that all these foreclosed homes will flood the market and drive down prices even more for existing homes, making it harder for new-home builders to compete. First Published: September 17, 2009: 8:54 AM ET

Pending Home Sales on a Record Roll

Contract activity for pending home sales has risen for six straight months, a pattern not seen in the history of the index since it began in 2001, according to the National Association of REALTORS®. The Pending Home Sales Index, a forward-looking indicator based on contracts signed in July, increased 3.2 percent to 97.6 from a reading of 94.6 in June. It is 12 percent higher than July 2008 when it was 87.1. The index is at the highest level since June 2007, when it was 100.7.

Affordability at Record High

Lawrence Yun, NAR chief economist, says the housing market momentum has clearly turned for the better. “The recovery is broad-based across many parts of the country. Housing affordability has been at record highs this year with the added stimulus of a first-time buyer tax credit,” he says. “Other buyers are taking advantage of low home values before prices turn higher," Yun says. "Nationally, the typical mortgage payment now takes less than 25 percent of a middle-income family’s monthly income to buy a median priced home, with payment percentages so far in 2009 being the lowest on record dating back to 1970. As long as home buyers stay within their budget, mortgage payments will be very manageable."

First-Time Buyers

NAR estimates that about 1.8 to 2 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit. Buyers have little time to act because they must complete the transaction by Nov. 30 to qualify for the credit. Unless extended, contracts signed but not completed by that date will not be eligible – it is taking approximately two months to complete home sales in the current market.

By Region

Northeast: The Pending Home Sales Index declined 3 percent to 78.8 in July but is 4.7 percent higher than July 2008. Midwest: The index slipped 2 percent to 88.1 but is 8.1 percent above a year ago. South: Pending home sales activity rose 3.1 percent to an index of 103.8 in July and is 12 percent above July 2008. West: The index jumped 12.1 percent to 112.5 and is 20 percent above a year ago.

"Keep the Momentum Going"

NAR President Charles McMillan says Congress needs to keep the momentum going. “Even with a good recovery taking place, the market is not yet back to normal. With a gradual absorption of inventory, we are on the cusp of a general stabilization in home prices,” he says. “To ensure that housing has a broad stimulus to the overall economy and stays on sound footing, we’re encouraging Congress to extend the tax credit into 2010, and to expand it to all buyers of primary residences. The faster we stabilize home prices, the fewer families will face foreclosure and the quicker credit can be extended to other sectors of the economy.” NAR’s Housing Affordability Index stood at 158.5 in July, below the peak set in April but is still 36 percentage points higher than a year ago. The HAI is a broad measure of housing affordability using consistent values and assumptions over time, which examines the relationship between home prices, mortgage interest rates, and family income. Yun expects existing-home sales to rise through the fourth quarter. “Unless the tax credit is extended, no one should be surprised to see home sales drop in the first quarter of next year,” he says. “However, the fundamentals of the housing market and the economy are trending up, and we expect home sales to generally pick up in the second quarter of 2010. The buyer psychology may be shifting from, ‘Why buy now when I can purchase later?’ to ‘I don’t want to miss out on a recovery.’” Source: NAR