Home builders haven’t been this optimistic since early 2018

Low-interest rates boost confidence among residential builders in October

Sales of new and existing homes have perked up due to tumbling mortgage rates. Homebuilders are the most optimistic since early 2018.

The numbers: Homebuilders are gung-ho again thanks to dramatically lower mortgage rates.

A survey of home-builder sentiment surged to a 20-month high of 71 in October from 68 in the prior month, the National Association of Home Builders said Wednesday.

Readings over 50 are a sign that confidence is improving. Just 10 months ago, the index stood at a 3½-year low of 56.

What happened: Falling mortgage rates have reinvigorated a moribund housing market. The combination of lower mortgage costs and slowing growth in housing prices has drummed up fresh demand.

Builders are even more optimistic about the near future. Another index that tracks expectations in the next six months rose to a 19-month high and is close to a post-recession peak.

Big picture: Sales of new and previously owned homes as well as new construction have perked up following a steep decline in interest rates during the busy summer shopping season. A 30-year fixed mortgage has tumbled to as low as 3.5% from more than 5% a year earlier.

Refinancings have also exploded, leaving more money on the table for consumers.

The flush of new demand, however, has exacerbated a shortage of homes for sale, especially existing homes. The lack of supply is keeping the cost of housing relatively high even though prices aren’t rising as rapidly as they were a year earlier.

The rebound in the housing market is giving a U.S. economy a boost just as growth slows, but builders themselves might back off if growth slows further.

Read: Six-month winning streak in U.S. retail sales snapped in September

What they are saying? “The second half of 2019 has seen steady gains in single-family construction, and this is mirrored by the gradual uptick in builder sentiment over the past few months,” said NAHB Chief Economist Robert Dietz. “However, builders continue to remain cautious due to ongoing supply-side constraints and concerns about a slowing economy.”

Market reaction: The Dow Jones Industrial Average DJIA, -0.52% and S&P 500 SPX, -0.30% slipped Wednesday morning. Stocks have been rising recently on hopes of a U.S.-China trade deal, but doubts linger. A weak retail-sales report added to the negative tone.

The 10-year Treasury yield TMUBMUSD10Y, -4.92% slipped to 1.76%.MORE FROM MARKETWATCH

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