Homebuilder exchange traded funds were rallying more than 2% on Wednesday after a builder confidence index rose to its highest level in over four years.

The National Association of Home Builders/Wells Fargo housing market index rose to 24 in January from 21 the previous month. The jump in the confidence index was unexpected, and the benchmark hasn’t been this high since June 2007.

“Builders are seeing greater interest among potential buyers as employment and consumer confidence slowly improve in a growing number of markets, and this has helped to move the confidence gauge up from near-historic lows in the first half of 2011,” said NAHB Chief Economist David Crowe. “That said, caution remains the word of the day as many builders continue to voice concerns about potential clients being unable to qualify for an affordable mortgage, appraisals coming through below construction cost, and the continuing flow of foreclosed properties hitting the market.”

SPDR S&P Homebuilders (NYSEArca: XHB) rose 2.1% on Wednesday while iShares Dow Jones US Home Construction (NYSEArca: ITB) added 2.7%. The ETFs have climbed above their 200-day moving averages after being decimated by the housing bust.

Homebuilder ETFs have been outperforming the market by a wide margin since the October low for stocks. SPDR S&P Homebuilders is up 27.8% over the past three months, compared with an 8.3% gain for the S&P 500, according to Morningstar. [Housing ETFs Build Gains but Analysts Skeptical]

iShares Dow Jones US Home Construction

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