Confidence among U.S. homebuilders rose in October to the highest level in four months, a sign residential construction is stabilizing at depressed levels.

The National Association of Home Builders/Wells Fargo confidence index increased to 16, exceeding the most optimistic forecast in a Bloomberg News survey, from 13 the prior month, data from the Washington-based group showed today. The gauge was projected to rise to 14, according to the median estimate in the Bloomberg survey.

Housing construction will be slow to recover after the end of a home buyers’ tax credit and as foreclosures flood the market with cheaper homes. Unemployment near a 26-year high of 10.1 percent is making it difficult for Americans to take advantage of the lowest mortgage rates on record.

“It is encouraging to see a little more optimism on the housing side, which might mean the sector is starting to stabilize,” said John Ryding, chief economist at RDQ Economics LLC in New York.

Index readings lower than 50 mean more respondents said conditions were poor. Estimates in the Bloomberg survey of 47 economists ranged from 12 to 15. The measure reached a record low of 8 in January of last year and averaged 54 in the five years before the recession began in December 2007.

Stocks Rise

Stocks and Treasury securities maintained gains after the report. The Standard & Poor’s 500 Index rose 0.3 percent to 1,179.17 at 10:31 a.m. in New York. The yield on the 10-year Treasury note fell to 2.52 percent from 2.56 percent on Oct. 15. The S&P Supercomposite Homebuilders Index declined 0.3 percent.

The builders group’s index of current single-family home sales increased in October to 16 from 13, and the measure of sales expectations for the next six months rose to 23 from 18. The gauge of buyer traffic increased to 11 from 9.

The measure of builder confidence rose in all four U.S. regions.

“Builders are starting to see some flickers of interest among potential buyers, and are hopeful that this interest will translate to more sales in the coming months,” NAHB Chairman Bob Jones, a homebuilder from Bloomfield Hills, Michigan, said in a statement.

With foreclosures reaching a record in September, U.S. regulators last week said they were investigating whether employees of lenders including Ally Financial Inc., JPMorgan Chase & Co. and Bank of America Corp. had falsified documents used in foreclosure proceedings.

Foreclosures Suspended

Ally Financial and Bank of America are among banks that have suspended some foreclosures or evictions to review paperwork, which may further delay a recovery in housing as it takes longer to clear inventory.

Work began on 580,000 homes at an annual pace in September, down from 598,000 in August, according to the median forecast of economists surveyed before a Commerce Department report tomorrow.

Housing starts plunged to a record-low 477,000 pace in April 2009 after reaching a three-decade high of 2.27 million in January 2006. They rose to a 685,000 level in April this year, thanks to the $8,000 tax credit that expired that month.

Miami-based Lennar Corp. is among companies finding other ways to boost earnings as sales languish. The fourth-largest U.S. homebuilder by revenue bought about $740 million of distressed loans and real estate from three financial institutions to boost earnings, the Miami-based company said Oct. 1 in a statement.

The newly purchased loans and properties represent “an excellent investment opportunity for our shareholders,” Lennar Chief Executive Officer Stuart Miller said in the statement. The package includes about 397 loans and 306 properties in 17 states, primarily in the mid-Atlantic and Southeast.