Increased costs for building materials coupled with a short supply of developed lots and labor is taking a toll on homebuilder confidence, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index. 

These factors pushed the index down to 42 in April, compared to March’s 44. The index hit a recovery peak of 47 in December and January. 

"The upswing for the new home market may be a very short one based on the housing market index which fell 2 points to a much lower-than-expected 42," said Econoday analysts. "This is the lowest reading since October and the outcome, for the second straight month, is below Econoday's low estimate."

The decline of the past two months push confidence levels "further below breakeven 50 to indicate that more builders describe conditions as bad than good," commented analysts at Econoday.

"Many builders are expressing frustration over being unable to respond to the rising demand for new homes due to difficulties in obtaining construction credit, overly restrictive mortgage lending rules and construction costs that are increasing at a faster pace than appraised values," said NAHB Chairman Rick Judson, who noted that these challenges are holding back new building and job creation, despite generally improving sales conditions.

The HMI component of the index, which gauges current sales conditions, dropped two points in April to 45, while the buyer-traffic component declined four points to 30. However, builders appear to be increasingly confident about sales expectations in the next six months, as that portion of the index increased a three-point gain to 53. This marks the highest level since February 2007. 

The South seemed to take the brunt of the decline, with its HMI component falling four points to 42. The Northeast remained unchanged at 38, while the West dropped three points to 55 and the Midwest fell two points to 45.

According to Judson, the supply chains for building materials, developed lots and skilled works will still take some time to re-establish themselves following such a rough recession.

However, notes Judson, "builders’ outlook for the next six months has improved due to the low inventory of for-sale homes, rock bottom mortgage rates and rising consumer confidence."