NEW YORK - U.S. homebuilder sentiment rose in September to its highest level since May 2008, the National Association of Home Builders said on Wednesday, bolstering the view that the battered housing market is stabilizing.

The NAHB/Wells Fargo Housing Market index climbed to 19 from 18 in August, in line with the forecast in a Reuters survey.

Government programs that have pushed down U.S. mortgage rates and instituted an $8,000 tax credit for first-time home buyers have stimulated demand, the industry group noted in a statement.

Restoring and maintaining stability in the housing market is critical for economic growth.

The sentiment index plunged to a record low of 8 in January and has since steadily climbed. Readings below 50, however, mean more builders view market conditions as poor than favorable.

Today's report indicates that builders are starting to see some glimmers of light at the end of the tunnel in terms of improving sales activity, NAHB Chief Economist David Crowe said in a statement.

Two of the three subindexes of the Housing Market Index rose in September. The current sales condition gauge rose 2 points to 18 and the index measuring prospective buyer traffic climbed 1 point to 17 this month.

But the index of sales expectations for the next six months declined 1 point to 29, raising concerns about the sustainability of housing market momentum as some federal rescue programs are poised to end.

Those hurdles include the impending expiration of the $8,000 tax credit as well as the critical lack of credit for housing production loans and continuing problems with low appraisals that are sinking one quarter of all new-home sales, Crowe said.

Eligible first-time home buyers must close on their loans by November 30, when the tax credit incentive is set to end.

The real estate industry is pushing for Congress to extend the tax credit beyond that deadline, to increase it to $15,000 and broaden it to all buyers.

Congress needs to act now to keep the credit from expiring just as its intended effect on buyer demand is starting to materialize, NAHB Chairman Joe Robson, a builder from Tulsa, Oklahoma, said in the statement.

In September, all four regions saw improvement in sentiment. The Midwest had the biggest increase of 3 points to 19, its highest reading since July 2007.

The Northeast rose 2 points to 24, the South increased 2 points to 19 and the West rose 1 point to 18.

(Reporting by Lynn Adler, Editing by Chizu Nomiyama)

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