For the third consecutive month, the National Association of Home Builders/Wells Fargo Housing Market Index experienced a monthly gain. In July, the index rose six points from June to 57, representing the strongest reading since January of 2006. 

"Today’s report is particularly encouraging in that it shows improvement in builder confidence across every region as well as solid gains in current sales conditions, traffic of prospective buyers and sales expectations for the next six months," noted NAHB Chairman Rick Judson, a home builder from Charlotte, N.C. 

However, he cautioned that this positive momentum could be disrupted by threats on the policy side, particularly with regard to the mortgage interest deduction and federal support for the housing finance system. 

"Builders are seeing more motivated buyers coming through their doors as the inventory of existing homes for sale continues to tighten," noted NAHB Chief Economist David Crowe. "Meanwhile, as the infrastructure that supplies home building returns, some previously skyrocketing building material costs have begun to soften."

The index is derived from a monthly survey conducted by NAHB. The survey intends to gauge builder perceptions of current single-family home sales and sales expectations for the next six months, as well as to rate traffic of prospective buyers. Any number higher than 50 indicates that more builders view conditions as good than poor. 

In July, all three HMI components posted gains. The component gauging current sales conditions increased five points to 60 — the highest level since 2006. Meanwhile, the sales expectations component gained seven points to 56, while the component gauging traffic of prospective buyers rose five points to 45, the strongest readings for each since late 2005. 

The positive attitude was spread throughout the country, as all four regions posted gains to their HMI scores’ three-month moving averages. 

The Northeast posted a four-point gain to an index score of 40, while the Midwest rose eight points to 54. The South posted a five-point gain to 50 and the West recorded a three-point gain to 51.

Analysts at Econoday noted, "This report, as well as the housing sector as a whole, has been coming up from a low base which limits the risk that gains underway may be unsustainable and could reverse. And the gains, interestingly, are coming at a time when mortgage rates are on a sharp climb, a factor that perhaps is pushing nervous buyers into the market though this possibility isn't supported by weekly mortgage banker data where mortgage applications for home purchases are on the decline."