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Home builders are feeling more confident about the housing market as lower mortgage rates fuel expectations of strong demand from buyers.

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

The continued enthusiasm reflects the strength of the market for newly built homes and expectations that mortgage interest rates will continue to decline, increasing buyer appetite.

“Buyer traffic is improving, as even small interest rate declines will produce a disproportionately positive response among potential homebuyers,” Alicia Huey, president of NAHB, a custom home builder and developer from Birmingham, Ala., said in a press release.

“While mortgage rates are still too high for many potential buyers, we expect that due to pent-up demand, many buyers will enter the market if mortgage rates continue to decline this year.”

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

Meanwhile, the share of construction companies offering some form of incentive fell to 58% in February, down from 62% in January, the lowest percentage since last August.