The Housing Market Index (HMI) shot up six points in July, reflecting the highest level of builder confidence in the market for new homes since January 2006. The Index, issued by the National Association of Home Builders (NAHB) and Wells Fargo rose from 51 to 57, the third consecutive monthly gain. Similar increases were reported for each of the index's three components.

The HMI reflects the answers given by NAHB's homebuilder members to a series of monthly questions about the new home market. The survey, conducted for the last 25 years, asks respondents to gauge their perceptions of the current market, their expectations from the market over the next six months, and the current traffic of prospective buyers. Each component is scored separately and the scores are used to construct the composite index. Any score over 50 indicates that more builders view market conditions as good rather than poor.

All three components improved in July. The component measuring current sales conditions rose five points to 60, the highest level since early 2006 and builder responses about their expectations over the next six months resulted in an index of 67, a seven point jump from June. Responses put current buyer traffic at a level of 45, up five points. Both the traffic and six-month expectation levels are the highest since late 2005.

"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."

All four regions also posted gains in their HMI scores' three-month moving averages. The Northeast showed a four-point gain to 40 while the Midwest reported an eight-point gain to 54, the South posted a five-point gain to 50 and the West measured a three-point gain to 51.

"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. 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."