Builders are less confident about the state of the housing market this month than they were in February, according to the National Association of Home Builders Housing Market Index, which was released Monday (March 19).

The NAHB index, compiled in collaboration with Wells Fargo, fell 8% from a downwardly revised 39 in February to a 36 in March, reflecting builder concerns about the impact of rising foreclosures on subprime mortgages. The February number was 33% below that of the same month last year. Still, the index of 36 remains significantly higher than the low point of 30 registered in September, 2006.

"Builders are uncertain about the consequences of tightening mortgage lending standards for their home sales down the line, and some are already seeing effects of the subprime shakeout on current sales activity," said NAHB Chief Economist David Seiders. "NAHB continues to forecast modest improvements in home sales during the balance of 2007, although the problems in the mortgage market increase the degree of uncertainty surrounding our baseline (i.e., most probable) forecast."

The index is based on a survey of 375 builders who are asked to rate current single-family home sales and sales expectations for the next six months as either "good," "fair" or "poor." The survey also asks builders to rate traffic of prospective buyers as either "high to very high," "average" or "low to very low." Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

All three component indexes declined in March. The index gauging current single-family home sales and the index gauging sales expectations for the next six months each declined three points, to 37 and 50, respectively. Meanwhile, the index gauging traffic of prospective buyers declined a single point, to 28.

In the Midwest and West, the HMI gained one point to 28 and 36, respectively. In the Northeast, the HMI declined two points to 41, and in the South, it fell four points to 40.

The news was worse than expected on Wall Street, but two firms pointed out that the numbers still remain well above the low last September. The building research group at JP Morgan Securities put out a bulletin stating, "while all three of the Index's components declined, they all remained solidly above their September troughs. Given our recent report detailing our view of the potential impact of the subprime fallout, 'Subprime Fears Overdone,' we believe that while this issue may prolong a recovery, current fears are more than reflected in the stocks, and hence reiterate our positive sector stance."

Margaret Whalen, lead analyst for the home building and building products team at UBS, said in a research note, "We expect conditions to remain challenging until excess inventory levels subside toward the end of '07, limiting pricing power in the near term. That said, as operating conditions improve, we expect public builders to gain share from private builders that are facing greater capital constraints." The note also said, "Traffic levels are now 27% above the Sept. '06 trough, underscoring our belief that the downturn is more a function of excess supply versus waning demand."