By Jeanna Smialek
June 17, 2013 10:15 AM EDT

Builders started work on 780,000 homes last year, a 28 percent increase from 2011 and the most in four years.

Confidence among U.S. homebuilders surged in June to the highest level in seven years, reflecting gains in sales as Americans rushed to take advantage of low mortgage rates.

The National Association of Home Builders/Wells Fargo index of builder sentiment rose 8 points, the biggest monthly increase since September 2002, to 52 during the month, the Washington-based group reported today. The reading, the highest since March 2006, exceeded all 50 forecasts in a Bloomberg survey in which the median was 45. Readings above 50 mean more respondents said conditions were good.

“Builders are experiencing some relief in the headwinds that are holding back a more robust recovery,” David Crowe, the group’s chief economist, said in a statement. “Today’s report is consistent with our forecast for a 29 percent increase in total housing starts this year.”

Low mortgage rates, a strengthening job market and limited inventories are benefiting builders including PulteGroup Inc. and Lennar Corp. as the housing market contributes to growth this year after emerging as a bright spot in 2012. Gains in housing will help the world’s largest economy move through a global slowdown that is hurting manufacturing.

A report today showed manufacturers in the New York region felt more optimistic in June even as orders, sales and employment dropped, indicating the area’s factories are looking beyond the current slowdown in growth.

Empire State

The Federal Reserve Bank of New York’s general economic gauge, known as the Empire State index, climbed to 7.8 this month, the highest reading since March, from minus 1.4 in May. Readings of greater than zero signal expansion in New York, northern New Jersey and southern Connecticut. The median projection in a Bloomberg survey of 51 economists called for a reading of zero.

Estimates in the Bloomberg survey for the homebuilder index ranged from 42 to 47. The index, first published in January 1985, averaged 54 in the five years leading to the recession that began in December 2007. It reached a record low of 8 in January 2009.

Builder shares rallied after the report. The Standard & Poor’s Supercomposite Homebuilding Index of 11 companies gained 2.4 percent. The S&P 500 index climbed 1 percent to 1,643.12 at 10:10 a.m. in New York.

The confidence survey asks builders to characterize sales as good, fair or poor and to gauge prospective buyers’ traffic. It also asks participants to assess the six-month outlook.

Sales Outlook

All three components of the homebuilder survey climbed to their highest levels since March 2006. The group’s gauge of the sales outlook for the next six months rose to 61 in June from 52.

Prospective-buyer traffic advanced to 40 this month from 33. An index of current single-family home sales increased to 56 in June from 48.

Builder confidence improved in three of the four U.S. regions. A gauge of sentiment in the Midwest increased to 57 in June, the highest in records dating back to 2004, from 44. In the South, it rose to 53 from 44, and climbed to 50 from 41 in the West. Confidence eased in the Northeast.

The recovery in housing is spreading beyond builders and benefiting companies such as Richardson, Texas-based Lennox International inc., a maker of furnaces and air conditioners.

“Over the last few years, it’s been tough to say that being in a business or an industry that’s tied closely to housing is a good thing,” Joseph W. Reitmeier, chief financial officer of Lennox International, said in a June 12 presentation. “We can actually say that now.”

Mortgage Rates

Inexpensive borrowing costs are helping to attract would-be homebuyers, while a recent pickup in mortgage rates could be spurring buyers to enter the market to avoid even higher costs. The average rate for a 30-year fixed mortgage climbed to 3.98 percent, a 14-month high, in the second week of June, McLean, Virginia-based Freddie Mac said in a statement last week. Mortgage rates have risen for six straight weeks.

Builders started work on 780,000 homes last year, a 28 percent increase from 2011 and the most in four years. Figures tomorrow may show housing starts increased to a 950,000 annual pace in May from an 853,000 rate a month earlier, economists forecast the Commerce Department to report.

To contact the reporter on this story: Jeanna Smialek in Washington lwoellert@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net.