May 18 (Reuters) - U.S. home builder sentiment unexpectedly improved in May, but construction firm attitudes about the housing market remain subdued as the war in Iran stokes inflation pressures that are elevating everything from building material prices to buyers' mortgage rates.

The National Association of Home Builders/Wells Fargo Housing Market index rose to 37 this month from 34 in April, the 25th straight month has held below the break-even point of 50. Economists polled by Reuters had forecast the index would be unchanged at last month's seven-month low of 34.

"The housing market remains soft as higher mortgage rates, rising gas prices and economic uncertainty related to the war in Iran continue to dampen buyer demand," NAHB Chairman Bill Owens, a home builder and remodeler from Worthington, Ohio, said in a statement.

Home affordability conditions had improved at the start of the year, with the interest rate on popular 30-year fixed-rate mortgages dropping below the 6% level - the lowest since September 2022 - near the end of February, according to Freddie Mac. As the month ended, though, the U.S. and Israel launched attacks on Iran. The ensuing spike in oil prices revived inflation pressures that have driven the yields on the U.S. Treasury securities that serve as a benchmark for mortgages to the highest in about 15 months. Home loan costs have shot higher since and are likely to climb further.

"Recent increases for long-term interest rates will continue to hold back home buyer demand," said NAHB Chief Economist Robert Dietz. "Although some regional markets, including parts of the Midwest, are showing relative strength, the housing market continues to face significant affordability challenges."

About 32% of builders cut prices in May, down from 36% in April, with an average price reduction of 6% versus 5% in April. The use of sales incentives was 61% in May, up from 60% in April, the 14th straight month at 60% or higher. 

The survey's measure of current sales conditions rose to 40 from 37 in April, while its gauge of future sales climbed to 45 from 42. A measure of prospective buyer traffic increased to 25 from 22.    

The U.S. housing market remains on a back foot. 

Sales of existing homes - by far the largest segment of the residential real estate market - are parked near a 4 million-unit annual run rate, a sales pace that characterized market doldrums near the low point of the 2007-to-2009 financial crisis. New home sales, meanwhile, began the year at a three-year low but showed some improvement in February and March. Data for April is due near the end of May.

On Thursday the Census Bureau will report data on housing starts and building permit issuance for April, data that recently has sent even more mixed signals about the state of residential home construction. Ground breaking on new single-family homes surged in March to the highest in more than a year, but issuance of new building permits - a gauge of future activity - fell sharply, suggesting the pick up in new construction may be shortlived.