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WASHINGTON, DC-Multifamily investment and development are firing on all cylinders. At the same time, private-equity companies are eyeing the single-family foreclosed-home market as a growth opportunity. Finally, mortgage lenders such as Bank of America are trying out pilots in which defaulting homeowners can rent their properties instead of being evicted. Is there room is this scenario for new home development? Apparently yes.

Builder confidence in the market for newly built, single-family homes grew by five points in May from a downwardly revised reading in the previous month to reach a level of 29 on the National Association of Home Builders/Wells Fargo Housing Market Index, released today. It is the index's strongest reading since May of 2007.

"While home building still has quite a way to go toward a fully healthy market, the fact that the HMI has returned to trend is an excellent sign that firming home values, improving employment and low mortgage rates are drawing consumers back," says NAHB chief economist David Crowe. "The pace of this emerging recovery could be stronger were it not for the significant impediments that the market continues to face with regard to builder and consumer access to credit, inaccurate appraisals, and more recently, rising materials prices."

Three out of four regions in the index registered improving builder sentiment for the month. There was a six-point gain to 32 in the Northeast, and five-point increases to 27 and 28 in the Midwest and South, respectively. The West posted a two-point decline to 29.

The index suggests a potential storm might be brewing for multifamily builders. Already, some multifamily developers are expressing concern that low-barrier-to-entry markets are heading for an oversupply. If new homes enter the pipeline as well, decreasing prices on existing houses, homeownership might become more affordable for at least a portion of those people who might have rented instead.