The National Association of Home Builders' measure of builder confidence in the new home market took an unexpected turn downward in March as unsettled winter weather and fear of more foreclosed properties hitting the market more than offset optimism for the spring selling season.

The NAHB/Wells Fargo Housing Market Index (HMI) dropped back to 15 from 17 in February. Analysts were expecting the index to remain at 17.

The decline to 15 matched the January index, itself a decline from 16 in December and 17 in November. The index hit its 2009 peak of 19 in September.

Any reading below 50 in the HMI indicates negative builder sentiment. The index fell below that level in May of 2006 and sank throughout 2007 and 2008 before hitting its historical low of 8 in January of 2008.

David Crowe, NAHB chief economist, said, "The lack of available credit for new projects, the large number of distressed properties for sale and the continuing hesitancy of potential buyers due to the weak job market are definitely weighing on builder confidence at this time."

NAHB Chairman Bob Jones, a Bloomfield Hills, Mich. home builder, added, "Unusually poor weather conditions certainly had a negative effect on builders' business in February... At the same time, the continual flow of distressed properties priced below the cost of production is having an adverse effect on new-home appraisals and also making it tough for builders'customers to sell their existing homes."

Crowe, however, said he expected conditions to improve. "The inventory of new homes on the market is at an extremely low level, and we do expect a 25 percent improvement in new-home construction in 2010 over 2009 to rebuild inventory and meet expected pent-up demand."

Builders were not as optimistic. All three component indexes of the HMI fell in March; the component gauging current sales conditions declined two points to 15; the component gauging sales expectations in the next six months declined three points to 24; the component gauging traffic of prospective buyers declined two points to 10.

Regionally, the HMI results were mixed. The Northeast gained five-points to 23, the West posted a one-point gain to 15, the Midwest fell three points to 10 and the South dropped a point to 18.

Michael Rehaut, home building analyst for J.P. Morgan, put out a research note advising clients to take the dip in stride. "While March's NAHB Survey of 15 was modestly disappointing ... we note this level remains within the range demonstrated over the last 6 months between 15 and 17, and hence believe the housing market continues to demonstrate a trend of stabilization at levels solidly above 1H09's average of 12." He added, "Overall, given our outlook for demand to stabilize and slowly re-emerge over the next 24 months as the builders continue to position themselves for a Spring selling season likely better than last year's, we maintain our positive sector stance. Specifically, amid this environment, combined with a more manageable supply dynamic as foreclosures continue to be liquidated at a more moderate pace, we believe builders should continue to demonstrate positive order growth momentum during 2010, as well as improvement in core operating margins and a lower level of impairment charges."