By Safiyah Riddle

U.S. home builder sentiment hit a 13-month high in July as limited housing stock continued to drive demand for new houses, according to a survey on Tuesday, but the report also hinted at increasing challenges from tightening credit conditions in the months to come.

The National Association of Home Builders/Wells Fargo Housing Market index edged up by one point to 56 in July, the seventh consecutive monthly increase, meeting expectations from economist polled by Reuters.

Prospective buyer traffic also reached the highest level since June 2022 at 40, signaling resilient demand for new homes, despite the Federal Reserve's 500 basis points worth of interest hikes that have kept mortgage rates high. The appetite for new homes has strengthened because current home owners are reluctant to sell existing homes.

The single point increase in builder confidence marked a deceleration after two consecutive months of five point increases, highlighting increasing concern over the availability of construction financing.

“Although builders continue to remain cautiously optimistic about market conditions, the quarter-point rise in mortgage rates over the past month is a stark reminder of the stop and start process the market will experience as the Federal Reserve nears the end of the ongoing tightening cycle,” said NAHB chief economist Robert Dietz.

The housing market has been particularly sensitive to the Fed's fastest monetary policy tightening campaign since the 1980s aimed at taming inflation.

But Tuesday's report underscored uncertainty about home prices in the coming months: Only 22% of builders report cutting prices in July - down from 25% in June and 27% in May, and a 14 percentage point decrease from a peak of 36% in November.

(Reporting by Safiyah Riddle; Editing by Chizu Nomiyama)