The National Association of Home Builders (NAHB)/Wells Fargo housing market index rose by six points from 51 in June to 57 in July. Last month’s reading had been the highest for the index since January 2006. An index reading below 50 indicates that more builders view sales conditions as poor than view them as good. The reading was sharply higher than expected reading of 52.

Subindexes that measure current sales conditions and sales expectations came in at 60 in July, its highest level since early 2006. The reading on sales expectations rose seven points to 67, and the subindex that estimates prospective buyer traffic rose five points to 45. The reading for sales expectations is the highest since March 2006.

The NAHB’s chief economist noted:

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

The index hike to its highest level in seven and a half years is encouraging for the home builders. Inventories of homes for sale remain low, which drives up prices for buyers. Builders do not appear to be concerned about rising mortgage rates, which for first-time buyers are still very low.