U.S. homebuilder sentiment jumped to its highest level in eight months in May, a private survey showed on Monday, supporting views that the three-year housing slump might be close to an end.

The National Association of Home Builders/Wells Fargo Housing Market Index rose to 16 from 14 in April, in line with market expectations. The NAHB also said its measure of housing affordability surged 10 points to a record 72.5 in the first quarter of this year.

The NAHB attributed the second straight monthly increase in the housing market gauge -- which measures builder confidence in the market for newly built, single-family homes -- to the best home-buying conditions of a lifetime.

The group's chief executive officer, Jerry Howard, told Reuters that the two consecutive months of gains in the index were encouraging signs.

It is a very important indicator that we are approaching the bottom and market stability could be just around the corner, that is what we are hoping for, said Howard.

We are looking to reach bottom during the course of this summer and probably bounce along the bottom until early fall before things really start to get back to normal. We don't expect market equilibrium until 2012.

The Dow Jones home construction index <.DJUSHB> surged 6.65 percent, also buoyed by Citigroup's upgrading of its rating on the second largest U.S. homebuilder, Lennar Corp , to buy.

The Federal Reserve's aggressive cuts in interest rates to almost zero percent and buying of mortgage-backed securities have lowered the cost of home loans.


That, together with an $8,000 tax credit for first-time buyers, is helping to lend some stability to the distressed housing market. Other housing indicators have recently shown a sharp slowing in the pace of the market's decline, raising optimism that a bottom is not too far away.

Howard said he was also encouraged by a gradual reduction in the stock of unsold existing houses, currently at around an 11-month supply. He said the ideal level for inventories of existing home sales was a supply of six months.

The collapse of domestic house prices and the subsequent global credit crisis were the main catalysts for the U.S. recession, now in its 17th month, and restoring stability to the housing market is a key element to a recovery in the economy.

Housing starts and building permits data due out on Tuesday could bolster the argument of a gradual market recovery. A Reuters survey forecast housing starts to have picked up modestly in April to an annual rate of 520,000 units after falling to 510,000 the previous month.

The good news is that we likely have the worst of the housing crisis behind us. The bad news is that the housing market is only improving with turtle speed, said Torsten Slok, a senior economist at Deutsche Bank in New York.

NAHB chief economist David Crowe told reporters that while affordability was the best in years -- thanks to mortgage rates at historic lows and house prices at levels last seen in 2003 -- access to credit posed a major headwind to recovery.

Our greatest concern is the access to credit for both the borrower and the builder. Underwriting standards have been tightened. Buyers are sometimes asked to put larger payments down and builders are finding it difficult to get credit to build those homes, said Crowe.

The NAHB report also showed two out of three subindexes of the Housing Market Index rising in May.

The current sales conditions gauge climbed two points to 14, while the sales expectations measure for the next six months rose three points to 27. The traffic of prospective buyers index was unchanged at 13 in May.

While we are not ready to pop the champagne, there is light at the end of the tunnel here, said Howard.