Home builders believe the U.S. housing market is strengthening despite rising mortgage rates, a sign the sector could lift the economy during the latest rough patch.

The National Association of Home Builders, an industry trade group, said Tuesday that its housing-market index surged six points to a reading of 57 in July. That marked the third straight month of rising confidence in the market for newly built single-family homes. The index is now at its highest level since January 2006, near the height of the housing boom.

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The rise is significant because it comes amid a recent pickup in mortgage rates. The interest on a 30-year, fixed-rate mortgage was 4.51% as of Thursday, more than a percentage point higher than the level in early May. Rates are still low historically, but some people in the real-estate industry fear that if rates continue to rise significantly, home sales will slow and be a drag on the broader economy.

Tuesday's report shows that, so far, home builders are continuing to see increased interest from prospective home buyers as the inventory of existing homes remains tight.

The trade group said confidence improved in all regions of the country, reflecting "solid gains" in current sales conditions and an increase in prospective buyers visiting builders. Perhaps most significantly, home-builder confidence in sales conditions for the next six months also improved.

"Builders are seeing more motivated buyers coming through their doors as the inventory of existing homes for sale continues to tighten," David Crowe, the NAHB's chief economist, said in a statement. "Meanwhile, as the infrastructure that supplies home-building returns, some previously skyrocketing building-material costs have begun to soften."

The group said that threats remain--namely, that discussions on deficit reduction in Washington could take aim at policies that have helped housing. The group listed the mortgage-interest deduction and federal support for housing finance as policies that are being scrutinized.

The U.S. economy is leaning heavily on the housing market right now, with government spending cuts and recent sluggishness in consumer spending weighing on growth. Some economists believe gross-domestic-product growth may have slowed to an annual rate of less than 1% in the second quarter.
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The article Rising Mortgage Rates? Home Builders Shrug Them Off originally appeared on http://blogs.wsj.com.