Builders are much more confident about demand for new homes as the housing supply tightens, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index.

Builder confidence rose to a score of 46 on the NAHB/Wells Fargo index, which is the seventh month of consecutive confidence gains and up five points from the last survey. Still, it's just under the 50-mark, which generally indicates that half of builders view the single-family market as in good shape while the other half have a more pessimistic mood.

Still, the improvement is noticed among the building community, NAHB suggested.

"Builders are reporting increasing demand for new homes as inventories of foreclosed and distressed properties begin to shrink in markets across the country," said NAHB chairman Barry Rutenberg, a home builder from Gainesville, Fla.

"In view of the tightening supply and other improving conditions, many potential buyers who were on the fence are now motivated to move forward with a purchase in order to take advantage of today’s favorable prices and interest rates."

David Crow, an economist with NAHB, said what is constricting activity at this point is the difficult appraisal process and the tight lending conditions that are preventing some potential home buyers from getting loans.