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Homebuilder Sentiment Is High, Yet Housing Starts Still Lag

Stocks in this article: XHB IYR LEN TOL

NEW YORK ( TheStreet) -- Homebuilder confidence rose to a nearly eight-year high in August, the National Association of Home Builders said on Thursday.

The NAHB/Wells Fargo Housing Market Index rose for the fourth consecutive month to 59, as builders grew encouraged by firming home prices and rising demand amid a tight supply for homes.

But there is a disconnect between the sentiment as portrayed by the index and actual homebuilder activity. Housing starts are rising but they still remain well below normal.

According to a post on the NAHB website, the home builder sentiment index has more than doubled in the 14-month period from April 2012 to June 2013. In that same period, single-family housing starts have risen by only 17%.

The builder confidence index is designed to track and current future single-family starts and has historically been a good predictor of activity. However, there have been discrepancies between the index and starts during some periods, particularly periods of recovery.

In the previous housing recession of 1991-92, the sentiment index rose 130%, while starts rose only 71%. It took two and a half years for housing starts to double.

"Housing recoveries are dynamic periods when futures remain uncertain and reassembling the housing industry's infrastructure can be erratic," according to the post.

As "the industry recuperates and repairs itself," housing starts should start to improve. Right now, builders are facing multiple headwinds, with workers and developed lots being in short supply, building material costs soaring and credit still tight.

As a result, home builders are being careful, building just enough to make sure inventories stay lean and margins remain high.

-- Written by Shanthi Bharatwaj New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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