(Bloomberg News) Confidence among U.S. homebuilders rose in January to the highest level in more than four years as sales and buyer traffic improved.

The National Association of Home Builders/Wells Fargo sentiment gauge increased to 25 this month, exceeding the median forecast of economists surveyed by Bloomberg News and reaching the highest level since June 2007, the Washington-based group said today. Readings lower than 50 mean more respondents still said conditions were poor.

Record-low borrowing costs, a growing population and reduced prices may drive demand for homes this year even as another round of foreclosures threatens to weigh on the market. The confidence measure, which increased for a fourth straight month, improved in all four regions of the U.S.

This is "yet another indication of the gradual but steady improvement that is beginning to take hold in an increasing number of housing markets nationwide," Bob Nielsen, chairman of the National Association of Home Builders and a builder from Reno, Nevada, said in a statement.

The median forecast of 44 economists surveyed by Bloomberg News projected the index would climb to 22 from December's reading of 21. Estimates ranged from 20 to 25. The gauge, which was first published in January 1985, averaged 54 in the five years leading to the 18-month recession in December 2007. It reached a record low of 8 in January 2009.

Other reports today showed factory production climbed in December by the most in a year and wholesale prices unexpectedly dropped.

Manufacturing Accelerates

Manufacturing output increased 0.9 percent last month, more than double the 0.4 percent gain in November, figures from the Federal Reserve showed. Assembly lines churned out more business equipment and construction materials, according to the report, showing the improvement in housing is staring to ripple through the world's largest economy.

The producer price index fell 0.1 percent in December, the second decline in the past three months, according to data from the Labor Department.

The builders group's index of current single-family home sales increased to 25 this month, also the highest since June 2007, from a reading of 22 in December. The figure shows new construction of single-family houses may rebound after what may be the weakest year since records began in 1959. Starts may have finished 2011 at 423,000 dwellings, according to Bloomberg News calculations. The worst year was 2009, when 445,100 homes were started. The Commerce Department's construction report is due tomorrow.

Improving Expectations