SPDR S&P Homebuilders ETF (NYSEArca: XHB) and iShares U.S. Home Construction ETF (NYSEArca: ITB) traded higher Tuesday morning following a report that homebuilder industry confidence rose to the highest level in over seven years. However, the rally faded in midday trading as the sector ETFs fell into the red along with the major U.S. equity indices.

Builder confidence in the market for newly built, single-family homes rose by 6 points to 57, according to the National Association of Home Builders/Wells Fargo Housing Market Index for July.

It was the third straight monthly increase and the benchmark’s highest level since January 2006.

“Builders are seeing more motivated buyers coming through their doors as the inventory of existing homes for sale continues to tighten,” said NAHB Chief Economist David Crowe.

“Today’s report is particularly encouraging in that it shows improvement in builder confidence across every region as well as solid gains in current sales conditions, traffic of prospective buyers and sales expectations for the next six months,” said NAHB Chairman Rick Judson.

“This positive momentum could be disrupted by threats on the policy side, particularly with regard to the mortgage interest deduction and federal support for the housing finance system,” Judson added.

The homebuilder ETFs are trailing the market this year after a monster 2012. For example, ITB is up about 9% after a 79% rally last year.