The National Association of Homebuilders/Wells Fargo index of builder confidence rose this month to 44, the highest since September, from an unrevised 37 in December. A Reuters poll showed economists expected a reading of 39.

"Lower interest rates improved housing affordability conditions this past month, bringing some buyers back into the market after being sidelined in the fall by higher borrowing costs," said NAHB Chairman Alicia Huey. "Single-family starts are expected to grow in 2024, adding much needed inventory to the market. However, builders will face growing challenges with building material cost and availability, as well as lot supply."

The buyer traffic index swelled during the first half of last year as buyers looked to new construction in response to shortened inventory of existing homes. But traffic weakened during the second half of 2023, tracking with a rise in interest rates on the back of the Federal Reserve's aggressive rate hikes to contain inflation.

Interest rates peaked at two-decade highs near 8% in October, driving traffic to its lowest since December 2022, but rates have tumbled sharply since as the Fed has indicated it is done with rate hikes, helping to draw in prospective buyers.

For the week ended Jan. 12, the average 30-year fixed-rate mortgage has fallen to 6.75%, according to the Mortgage Bankers Association. Prospective buyer traffic has increased since December 2023, rising to 29 in January from 24 the month prior.

Despite brightening traffic, a significant proportion of builders continue to slash prices, though the share is ebbing, NAHB said. The share of builders cutting prices in January fell to 31%, the lowest portion since August, from 36% the month prior.

(Reporting by Amina Niasse; Editing by Chizu Nomiyama)

By Amina Niasse