Noting the confidence index had risen consistently, "there's still a long way to go on the road to recovery," said Barry Rutenberg, chairman of the trade group.
"In particular, unnecessarily tight credit conditions are preventing many builders from putting crews back to work," Rutenberg said.
The trade group said Tuesday that the Home Builders/Wells Fargo Housing Market Index for builder confidence added three points in September to reach 40.
The index is now at its highest level since February 2007.
NAHB Chief Economist David Crowe was also cautiously optimistic.
"Builders across the country are expressing a more positive outlook on current sales conditions, future sales prospects and the amount of consumer traffic they are seeing through model homes than they have in more than five years," Crowe said.
"However, against the improving demand for new homes, concerns are now rising about the lack of building lots in certain markets and the rising cost of building materials. Given the fragile nature of the housing and economic recovery, these are significant red flags," he said.