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Coupled with strong demand and mortgage rates below last fall’s cycle peak, the lack of existing inventory continues to drive buyers to new-home construction, helping push builder sentiment above the highest level since summer 2023.

In March, builder confidence in the market for newly built single-family homes climbed three points to 51, according to the NAHB/Wells Fargo Housing Market Index (HMI). Marking the fourth consecutive monthly gain for the index, it is also the first time that the sentiment level has surpassed the breakeven point of 50 since July.

“Buyer demand remains brisk, and we expect more consumers to jump off the sidelines and into the marketplace if mortgage rates continue to fall later this year,” says NAHB chairman Carl Harris, a custom home builder from Wichita, Kansas. “But even though there is strong pent-up demand, builders continue to face several supply-side challenges, including a scarcity of buildable lots and skilled labor, and new restrictive codes that continue to increase the cost of building homes.”

“With the Federal Reserve expected to announce future rate cuts in the second half of 2024, lower financing costs will draw many prospective buyers into the market,” says NAHB chief economist Robert Dietz. “However, as home building activity picks up, builders will likely grapple with rising material prices, particularly for lumber.”

In March, 24% of builders reported cutting home prices, down from 36% in December and the lowest share since July, yet the average price reduction remained at 6% for the ninth straight month. Meanwhile, the use of sales incentives is holding firm. The share of builders offering some form of incentive in March was 60%, which is between the 58% and 62% seen since September.

Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair,” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “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 conditions as good than poor.

All three of the major HMI indices posted gains in March. The HMI index charting current sales conditions increased four points to 56, the component measuring sales expectations in the next six months rose two points to 62, and the component measuring traffic of prospective buyers increased two points to 34.

For the three-month moving averages for regional HMI scores, the Northeast increased two points to 59, the Midwest gained five points to 41, the South rose four points to 50, and the West increased five points to 43.