WASHINGTON U.S. homebuilder sentiment rose to a 10-month high in May as tight housing supply boosted demand for new construction, according to a survey on Tuesday that also showed tightening credit conditions were becoming a challenge.

The National Association of Home Builders/Wells Fargo Housing Market index increased five points to a reading of 50 this month. The fifth straight monthly increase lifted the index to the midpoint mark of 50 for the first time since July 2022.

Economists polled by Reuters had predicted the index would be unchanged at 45.

"New home construction is taking on an increased role in the marketplace because many home owners with loans well below current mortgage rates are electing to stay put, and this is keeping the supply of existing homes at a very low level," said NAHB Chairman Alicia Huey in a statement.

Huey said despite the rising optimism, builders continued to face challenges to meet growing demand for new homes.

"These include shortages of transformers and other building materials, and tightening credit conditions for residential real estate development and construction brought on by the actions of the Federal Reserve to raise interest rates," said Huey.

The housing market has been the biggest casualty of the Fed's fastest monetary policy tightening campaign since the 1980s aimed at taming inflation.

According to the survey, the share of builders reducing home prices dropped to 27% from 30% in April. This share was as high as 36% last November. The average price reduction remained at 6%, unchanged for the past four months.

About 54% of builders offered some type of incentive to bolster sales, down from 59% in April and 62% last December.

(Reporting By Lucia Mutikani, Editing by Nick Zieminski)