The National Association of Home Builders/Wells Fargo Housing Market Index for May was 29, up five points from last month and the highest reading since May of 2007.
"Builders in many markets are reporting that buyer traffic and sales have picked back up after a pause this April," Barry Rutenberg, chairman of the NAHB, said in a statement.
The NAHB's chief economist David Crowe said firming home values, improving employment and low mortgage rates are drawing consumers back.
"The pace of this emerging recovery could be stronger were it not for the significant impediments that the market continues to face with regard to builder and consumer access to credit, inaccurate appraisals, and more recently, rising materials prices," Crowe said.
Three out of four U.S. regions registered improving builder sentiment in May. The Northeast led the way with a six-point gain to 32, followed by five-point gains to 27 and 28 in the Midwest and South, respectively. The West posted a two-point decline, to 29.