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May 15 (Reuters) - A private gauge of U.S. home builder sentiment unexpectedly rose in May to its second strongest level since the housing bust nearly a decade ago, as the existing supply of homes remained tight.
The National Association of Home Builders and Wells Fargo said on Monday their index of builder confidence in newly built, single-family homes climbed to 70 points from 68 in April. Analysts polled by Reuters had forecast the reading to be unchanged in May from April.
In March, the index reached 71 which was the highest since June 2005 during the height of the prior housing boom.
This report shows that builders optimism in the housing market is solidifying, even as they deal with higher building material costs and shortages of lots and labor, NAHB Chairman Granger MacDonald, said in a statement.
Some analysts cautioned the rise in mortgage rates this year would limit a pickup in home construction.
"While we expect a slight moderation in housing activity in the near term owing to higher mortgage rates, the picture for 2017-18 remains one of modest trend improvement," Barclays economist Blerina Uruci wrote in a research note.
The NAHB index is seen as a proxy on domestic housing starts.
The government will release its April housing starts report at 8:30 a.m. (1230 GMT) on Tuesday. Economists polled by Reuters forecast builders likely broke ground at an annualized rate of 1.260 million units, faster than a 1.215 million unit pace in March.
The survey's gauge on current single-family home sales rose to 76 points from 74 in April, while its six-month sales outlook index increased to 79, which was the highest since June 2005, from 75.
On the other hand, the barometer on prospective buyers dipped to 51 in May from 52.
On a regional basis, three of the four U.S. regions NAHB tracks, the Northeast, South and West, showed improved builder sentiment in May, but the Midwest recorded a decline.
(Reporting by Richard Leong in New York; Editing by Jeffrey Benkoe and Chizu Nomiyama)