A contractor works on the basement of a home under construction in the Toll Brothers Regency at Palisades community in Charlotte, North Carolina.

Luke Sharrett | Bloomberg | Getty Images

Buyer demand for newly built homes continues to surge, and that is keeping builder confidence high even as material prices climb.

Builder sentiment rose 1 point to 84 in February, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released Wednesday. Anything above 50 is considered positive sentiment. The index stood at 74 in February 2020.

“Lumber prices have been steadily rising this year and hit a record high in mid-February, adding thousands of dollars to the cost of a new home and causing some builders to abruptly halt projects at a time when inventories are already at all-time lows,” said NAHB Chairman Chuck Fowke, a custom homebuilder from Tampa, Florida. “Builders remain very focused on regulatory and other policy issues that could price out households seeking new homes in a tight market this year.”

While prices are a concern in both the new and existing home markets, there appears to be very little pullback in buyer demand. Of the index’s three components, current sales conditions held steady at 90, and traffic of prospective buyers rose 4 points to 72. Sales expectations in the next six months, however, fell 3 points to 80.

“Demand conditions remain solid due to demographics, low mortgage rates and the suburban shift to lower-cost markets, but we expect to see some cooling in growth rates for residential construction in 2021 due to cost factors, supply chain issues and regulatory risks,” said the NAHB’s chief economist, Robert Dietz. “Some builders are at capacity and may not be able to expand production due to these headwinds.”

Regionally, on a three-month moving average, builder sentiment in the Northeast rose 2 points to 78, and fell 1 point to 81 in the Midwest. In the South it dropped 2 points to 84 and in the West decreased 2 points to 93.