Builder confidence increased again in May, hitting its highest mark in five years.

Builder confidence hit its highest level in five years in the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) from the NAHB.

A measure of confidence in the newly built, single-family home market, the HMI gained five points from April to May to increase to 29, which is its strongest reading since May 2007.

David Crowe, the NAHB’s chief economist, said that though building is not quite out of the woods, it has markedly improved in recent months.

“While home building still has quite a way to go toward a fully healthy market, the fact that the HMI has returned to trend is an excellent sign that firming home values, improving employment and low mortgage rates are drawing consumers back,” Crowe said.

Derived from a monthly survey the NAHB has conducted for 25 years, the HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

Each of the index’s components rebounded from declines in the previous month. The component gauging current sales conditions and the component gauging traffic of prospective buyers each rose five points in May to 30 and 23, respectively, with the traffic component hitting its highest level since April of 2007. The component gauging sales expectations in the next six months rose three points to 34.

Regionally, both the Midwest and South were distinguished by five-point gains to 27 and 28, respectively.

The HMI is hardly the first sign of recovery in the homebuilding sector. Just last week, we reported on big year-over-year gains in the 55+ plus single-family market, and the week before that, the Census Bureau found that construction spending rebounded in March to a 6 percent increase from the year before.

Barry Rutenberg, chairman of the NAHB, said a number of positive economic factors have contributed to the higher builder confidence in 2012.

“Builders in many markets are reporting that buyer traffic and sales have picked back up after a pause this April,” Rutenberg said. “It seems we have resumed the gradual upward trend in confidence that started at the beginning of this year, as stabilizing prices and excellent affordability encourage more people to pursue a new-home purchase.”