Builder confidence in the market for new homes improved in March, but not by much.

After four months stuck at a reading of 16, the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) moved up one point to 17., the highest it has been since May of last year but still well below the reading of 50 necessary to break into a positive outlook. The reading was in line with Wall Street expectations.

Two of the three components of the HMI remained mired at February's depressed level. The component gauging current sales conditions remained at 17 and that gauging traffic of prospective buyers held at 12. Indicating a slightly improved outlook, however, the component gauging sales expectations in the next six months rose two points in March to 27, its highest since last May.

Regionally, the HMI fell a point in the Northeast to 20, the Midwest held flat at 12, the South rose two points to 20 and the West was up four points to 17.

"While many home buyers are still holding off on making a purchase, builders did indicate slightly increased optimism about the future with a two-point gain in the HMI component gauging sales expectations for the next six months," added NAHB Chief Economist David Crowe. "In fact, prevailing indicators portend some improvement in the overall economy, which should generate modest housing market gains later this year."

NAHB Chairman Bob Nielsen, a home builder from Reno, cited the now-familiar litany of factors that continue to suppress the housing market, including competition from short sales and foreclosures, inability to sell existing homes, "appraisals that are coming in below construction cost due to the inappropriate use of distressed properties as comps," and tight lending for mortgages and AD&C loans.

David Goldberg, home building analyst at UBS, acknowleged the same in his research note Tuesday morning. "Despite the pickup, we expect the index to be constrained through the spring selling season, as tighter underwriting standards, tougher comps and depressed confidence might limit any potential bounce."

Carl Reichardt at Wells Fargo had a different take on the numbers. "We are somewhat surprised that the sequential increase in the HMI was driven by an increase in future expectations, not on current sales or on current traffic," he wrote in his alert. "Our 'Neighborhood Watch Survey' (3/11/11) showed an improvement in traffic in February and March and better sales in March. Likewise, recent commentary from some public builders suggests a modest sequential improvement in field conditions. It is feasible that those surveyed (largely private companies) may be more pessimistic in outlook than larger publics."