U.S. homebuilders grew more confident in the housing recovery in August, as many reported that prospects for sales are the best they've been since the home bubble burst five years ago.

The National Association of Home Builders/Wells Fargo builder sentiment index released Wednesday rose two points this month to 37, up from 35 in July. That's the highest reading since March 2007.

The index, which is based on responses from 478 builders, has been trending higher since October and only dipped once since January — suggesting a turnaround in housing is solidifying after years of stagnation.

Any reading below 50 indicates negative sentiment about the housing market. The index hasn't reached that level since April 2006, the peak of the housing boom.

Homebuilders have mostly enjoyed improved sales trends this year, aided by low mortgage rates and a decline in the inventory of unsold homes. The pace of foreclosures slowed sharply last year, and banks appear to be holding back from flooding the market with foreclosed properties.

As confidence has increased, so has construction. Builders broke ground in June on the most new homes and apartments in nearly four years. And permits to build single-family homes rose to the highest level since March 2010.

Consumers also appear more upbeat about the housing market and are investing more in their homes. Home Depot, the nation's largest home improvement retailer, said healthy sales of paint, bathroom accessories and kitchen installations helped lift its net income in the second quarter by 12 percent.

Many economists believe that housing construction could contribute to overall economic growth this year for the first time since 2005.

"While there is still much room for improvement, we have come a long way from the depths of the recession and the outlook appears to be brightening," said Barry Rutenberg, chairman of the National Association of Home Builders.

In August, builders reported seeing the best sales level since February 2007, according to a separate measure in the NAHB survey. Their outlook for sales in the next six months is at the highest level since March 2007. Turnout by prospective buyers, meanwhile, returned to levels not seen since May 2006.

Still, the recovery has been subject to fits and starts. Sales of new homes fell 8.4 percent in June to a seasonally adjusted annual rate of 350,000 — the biggest decline since February 2011. That was down from a two-year high of 382,000 in May.

Sales remain well below the 700,000 annual rate that economists equate with healthy markets.

And the housing recovery could stumble further if economic growth and employment stay weak.

From April through June, employers added an average of only 73,000 jobs. And the economy grew at a tepid 1.5 percent annual rate in the second quarter.

Hiring appeared to recover somewhat in July. Employers added 163,000 jobs, the most since February. Still, the unemployment rate ticked up to 8.3 percent from 8.2 percent in June.

Though new homes represent less than 20 percent of the housing sales market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to the NAHB's data.