The National Association of Home Builders/Wells Fargo said Thursday that its index dropped to a reading of 54 after climbing to 59 in September, the highest level since November 2005, right before the housing bubble burst.
Readings above 50 indicate more builders view sales conditions as good rather than poor.
Analysts said readings in the mid-50s were in line with the current modest pace of recovery in housing. Sales of new homes did jump in August to the fastest pace since May 2008. But activity is still being held back by sluggish wage growth and a price surge that has put homes out of reach for many Americans.
The latest sentiment index showed that builders' views on current sales, their outlook for sales over the next six months and traffic by prospective buyers all fell in October.
Economists said the small decline did not alter their views that housing prospects remained favourable in coming months.
"Historically low mortgage interest rates, steady job gains and significant pent up demand all point to continued growth of the housing market," said David Crowe, chief economist for the home builders.
A separate report Thursday showed that mortgage rates hit new lows for the year this week. Mortgage company Freddie Mac said that the nationwide average for 30-year fixed-rate mortgages dropped to 3.97 per cent, down from 4.12 per cent last week. It was the lowest level since June 20, 2013 when 30-year mortgages were at 3.93 per cent.
By region of the country, builder sentiment in October was highest in the Midwest with a reading of 59 followed by readings of 58 in the South, 57 in the West and 41 in the Northeast.Suggest a correction