The report said the NAHB/Wells Fargo Housing Market Index surged up to 65 in September from a downwardly revised 59 in August.

Economists had expected the index to come in unchanged compared to the 60 originally reported for the previous month.

With the substantial increase, the housing market index reached its highest level since hitting a matching reading in October of 2015.

"With the inventory of new and existing homes remaining tight, builders are confident that if they can build more homes they can sell them," said NAHB Chief Economist Robert Dietz.

He added, "Though solid job creation and low interest rates are also fueling demand, builders continue to be hampered by supply-side constraints that include shortages of labor and lots."