Housing: Home builder sentiment rises for third-straight month amid tight inventories

Confidence among U.S. home builders rose slightly in March, the third-straight month builders have increased their optimism about the U.S. housing market.

The National Association of Home Builders/Wells Fargo's gauge of builder sentiment increased 2 points to 44, figures released Wednesday showed. Analysts had expected this index to come in at a reading of 40.

Still, readings under 50 for this index show a larger proportion of builders responding to the survey see conditions as "poor" than those who see conditions in the market as "good."

"Even as builders continue to deal with stubbornly high construction costs and material supply chain disruptions, they continue to report strong pent-up demand as buyers are waiting for interest rates to drop and turning more to the new home market due to a shortage of existing inventory," NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala, wrote in the press release.

"But given recent instability concerns in the banking system and volatility in interest rates, builders are highly uncertain about the near- and medium-term outlook," Huey added.

The sudden collapse of Silicon Valley Bank and Signature Bank within the last week has spilled into the Treasury market, sending mortgage rates sharply lower in turn. The average 30-year mortgage plunged to 6.57%, per the latest Mortgage News Daily quote.

The yield on the 10-year Treasury note, closely tracked with the average 30-year mortgage rate, stood near 3.54% early Wednesday, down from north of 4% just last week.

"While financial system stress has recently reduced long-term interest rates, which will help housing demand in the coming weeks, the cost and availability of housing inventory remains a critical constraint for prospective home buyers," NAHB Chief Economist Robert Dietz wrote in the press release.

Jeff Rose, right, and Wayne Green of Gillespie Fuels, install a heating system in a new home in Barre, Vt., Wednesday, Dec. 16, 2009. Construction of new homes, helped by better weather, rebounded in November following a setback in the previous month. (AP Photo/Toby Talbot)
Jeff Rose, right, and Wayne Green of Gillespie Fuels, install a heating system in a new home in Barre, Vt., Wednesday, Dec. 16, 2009. (AP Photo/Toby Talbot) (ASSOCIATED PRESS)

While some of today's opportunities for homebuyers may be in the new construction market, 40% of builders cite a poor sentiment for land availability, the report showed.

Still, as the banking sector chaos continues to unfold, questions have emerged on Wall Street around whether or not the Federal Reserve will proceed with its interest rate hikes given financial instability.

On the one hand, changing the trajectory of rate hikes could offer relief in the mortgage market. On the other hand, tighter financial conditions could make some lenders in the housing market more cautious in extending credit.

“And a follow-on effect of the pressure on regional banks, as well as continued Fed tightening, will be further constraints for acquisition, development and construction (AD&C) loans for builders across the nation. When AD&C loan conditions are tight, lot inventory constricts and adds an additional hurdle to housing affordability,” Dietz said.

The group’s measure of current sales conditions increased in March and the gauge of upcoming buyer traffic also advanced, marking the strongest traffic read since September of 2021. Meanwhile, sales expectations for the next six months dropped this month.

Builder sentiment in March climbed across all regions in the Northeast, Midwest, South, and West.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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