He added that builders in the Northeast and Midwest are seeing the pent-up demand for new homes that had been sidelined by lockdowns in the spring and that low interest rates are also driving demand. 'We expect housing to lead an overall economic recovery," he said.

But there are challenges, said NAHB's chief economist, Robert Dietz. Costs for building materials are rising and lumber prices are at a two-year high, Dietz said. What's more, "lot and skilled labor availability issues persist," he added.

That said, the "changing geography of housing demand," bodes well for new construction, Dietz said. "Flight to the suburbs is real," he said, adding that new home demand is improving in lower-density markets, including small metro areas, large metro exurbs and rural markets.

The NAHB/Wells Fargo Housing Market Index is a weighted average of three component indices: current single-family sales, sales for the next six months and prospective buyer traffic.

It is based on a survey asking builders to rate their perceptions of current single-family home sales and sales expectations for the next six months as either good, fair or poor and then to rate traffic from prospective buyers as high-to-very-high, average, or low-to-very-low. Those scores are used to calculate a seasonally adjusted index. 

Component indices also posted gains in July, according to the NAHB. The index gauging current sales conditions jumped 16 points to 79, while the component measuring sales expectations for the next six months rose seven points to 75. The indicator for traffic from prospective buyers jumped 15 points to 58.

For regional Housing Market Index scores, the Northeast posted the highest gain, a 22-point rise to 70. The Midwest followed with an 18-point increase to 68, while the South's score increased 10 points to 73 and the West increased 14 points to 80.