The National Association of Home Builders/Wells Fargo builder sentiment index rose to 29 in May. That's the highest reading since May 2007 and up from a downwardly revised reading of 24 in April.
The index rose for five straight months before levelling off in March and falling in April.
Still, any reading below 50 indicates negative sentiment about the housing market. The index hasn't reached hit that level since April 2006, the peak of the housing boom.
Homebuilders reported improving sales and higher traffic from prospective buyers. A gauge measuring confidence in sales over the next six months also rose, to 34 from 31.
The improved outlook follows other recent signs that the depressed housing market is slowly improving.
In March, builders requested the highest number of permits to build new homes and apartments in 3 1/2 years. And the number of people who signed contracts to buy homes rose in March to the highest level in nearly two years.
Mortgage rates have fallen to record lows and hiring has picked up, making it easier for more Americans to buy homes. Still, many would-be buyers are having difficulty qualifying for home loans or can't afford larger down payments required by banks.