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Homebuilders are feeling more confident about the housing market as a decline in mortgage rates bolsters expectations of stronger demand from buyers.

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) rose 4 points to 48 in February, marking the third consecutive month that sentiment gained and the highest level since August 2023. Economists polled by Bloomberg were anticipating a reading of 46.

The continued enthusiasm reflects the strength of the newly constructed home market and expectations that mortgage rates will continue to move lower, fueling more buyer appetite.

“Buyer traffic is improving as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala, in a press release.

“And while mortgage rates still remain too high for many prospective buyers, we anticipate that due to pent-up demand, many more buyers will enter the marketplace if mortgage rates continue to decline this year.”

Mortgage rates have softened from their near 8% peak last year, and more builders are cutting back on reducing home prices to boost sales. In February, 25% of builders reported cutting home prices, down from 31% in January and 36% in the last two months of 2023.

Meanwhile, the share of builders offering some form of incentive dropped to 58% in February, down from 62% in January and the lowest share since last August.