Housing activity picked up in January as more buyers seeking single-family homes entered the market. Increased consumer confidence in the nation's overall economic growth, employment stability and potential for improved household income in the coming year, along with concerns about rising interest rates and home prices, spurred potential buyers to act now while conditions are more favorable.

This buying surge could taper off quickly, however, as the inventory of existing homes for sale continues to shrink and builders struggle to keep pace with much-needed new home construction.

Although the number of new housing starts in January was down 2.6 percent compared to December, according to the U.S. Census Bureau and Department of Housing and Urban Development, single-family starts rose 1.9 percent. Sales of new single-family homes were up 3.7 percent month-over-month and 5.5 percent year-over-year, the agencies announced.

Total existing home sales increased 3.3 percent from December, accelerating at the fastest pace in nearly a decade, said the National Association of Realtors. Sales of existing single-family homes grew 2.6 percent, up 3.7 percent from a year ago.

The dollar value of residential construction in January nosed upward 1 percent, reported Dodge Data and Analytics. Single-family construction also rose just 1 percent, but was up 7 percent from the same period last year.

Optimism about the economy and their own job and income prospects would appear to be a major driver of consumers' decisions to act on their desire to purchase a single-family home. Various surveys conducted over the past two or three years have indicated a pent-up demand for homeownership, particularly standalone houses.

Gallup's U.S. Economic Confidence Index in January hit its highest level since the firm began collecting data in 2008; and for the first time since it started tracking data in 2001 on the question, a majority of Americans say now is a good time to find a quality job. The Conference Board's Consumer Confidence Index, too, has reached a 15-year high, with consumers rating business and labor market conditions as currently very favorable.

The Fannie Mae Home Purchase Sentiment Index (HPSI) increased by 2 percentage points in January to 82.7, ending a five-month decline. Consumers surveyed were largely optimistic about their personal financial prospects and the economy, noted Doug Duncan, senior vice president and chief economist at Fannie Mae.

This resurgence in interest in purchasing a home comes at a challenging time for the housing industry. Availability and affordability continue to limit prospective buyers' opportunities. Dwindling inventory of existing homes for sale is pushing up prices faster than real income growth.

Fannie Mae's HPSI finds the net share of Americans who believe that home prices will go up in the next 12 months rose by 7 percentage points over December's reading, while the net share of those who say it is a good time to buy a house fell by 3 percentage points. Requests for new single-family building permit authorizations declined 2.7 percent from December to January.

And the NAR's Pending Home Sales Index decreased 2.8 percentage points in the same time period. Lawrence Yun, NAR's chief economist, commented that home shoppers in January faced numerous obstacles in their quest to buy a home, including a significant shortage of listings along with deteriorating affordability as the result of higher home prices and mortgage rates.

"Home price increases in December were the largest in two and a half years, and homebuyers should expect the quickening of price gains to persist this spring buying season," Case Schiller recently stated.

What remains to be seen is whether new construction can keep pace with demand and alleviate some of the pressure in the marketplace.

The National Association of Home Builders projects single-family production will increase by 10 percent this year, nearly double the rate of last year. Yet builders are facing their own set of issues, including labor shortages and scarcity of supplies. Much depends on their ability to increase capacity so as not to have to turn away prospective buyers.