On Tuesday, fresh data released by the National Association of Home Builders/Wells Fargo Housing Market Index (:HMI), which reflects builder confidence in the market for newly built, single-family homes, posted a solid 26 point year-over-year gain to 47 for December. On a sequential basis, the index was up 2 points. This marks the eighth consecutive monthly gain, the highest since May 2006, when the index stood at 46.

Though any reading under 50 still indicates weak builder confidence, a substantial progress is being witnessed.

Top U.S. builders are witnessing improving sales condition, unseen in the past half a decade. Moreover, the quality of buyers has also improved with only those who are seriously considering a purchase coming forward, thanks to stricter lending standards.

Housing start numbers are due next and we expect positive results on that front too, consistent with the uptrend in the recent months. Building permits, the best indicator of housing starts are expected to edge up.

Last six months data through October clearly indicates that the recovery in housing is gaining momentum across the country as inventory levels are declining and home prices are on the rise. There are currently 4.8 months of supply of new houses (thanks to strong sales) on the market at the current sales rate and 5.4 months of supply of existing homes. This implies that home building contractors are seeing an increase in demand. They are finally seeing light at the end of the tunnel and are expecting to see solid gains in 2013.

Improving housing market fundamentals are attested by the recent results of top U.S. homebuilders like Lennar Corporation (LEN) and PulteGroup (PHM), both of which posted biggest overall profits since 2006.

Stocks such as D.R. Horton (DHI), and Toll Brothers (TOL) can be considered as a good investment opportunity. Fourth quarter earnings from KB Homes (KBH), which is expected to release on Thursday will provide more visibility as far as the housing market is concerned.

However, builders continue to remain a bit cautious given some fundamental challenges, which include a still fragile economy, obstacles related to project funding and less number of buyers qualifying for mortgage funding.

Nevertheless, the improving housing outlook will be one of the bright spots over the coming months in the face of other major concerns such as the US fiscal cliff and the European crisis.

Read the Full Research Report on PHM

Read the Full Research Report on LEN

Read the Full Research Report on TOL