Homebuilders' shares mostly rise even though August home starts fell 5% from July to hit three-month low; investors focus on builder permits, up 3.2% to highest level in eight months

Lorena Madrigal

LOS ANGELES , September 21, 2011 (Associated Press) – Shares of homebuilding companies traded mostly higher Tuesday despite a government report that showed builders broke ground on fewer homes in August.

Builders began work on a seasonally adjusted 571,000 homes last month, the Commerce Department said, a 5 percent decline from July and a three-month low. That's less than half the 1.2 million that economists say is consistent with healthy housing markets.

Single-family homes, which represent roughly two-thirds of home construction, fell 1.4 percent.

Still, investors appeared to focus more on the report's building permits data, a gauge of future construction. Building permits increased 3.2 percent last month to an annual rate of 620,000 — the highest level in eight months.

Home construction is down nearly 6 percent over the past year. But permits are up nearly 8 percent. That suggests builders aren't working on new homes, but may be preparing to start dormant projects when the economy improves.

A UBS Securities analyst' research note on Tuesday about builder PulteGroup also injected some optimism.

Analyst David Goldberg noted that while the economy appears to be weakening, he believes fundamentals for new homes are at or near a trough.

"While visibility for a turnaround is limited, we believe current valuations for selective builders offer attractive buying opportunities with minimal downside and significant upside potential," Goldberg wrote. He singled out D.R. Horton Inc., Lennar Corp. and Toll Brothers Inc. as his top stock picks among homebuilders.

The new-home market continues to bounce along the bottom, weighed down by weak consumer confidence, high unemployment, competition from foreclosures and tight mortgage lending standards.

At the start of the year, some forecasts called for improved housing starts and sales this year as the economy strengthened. That optimism dimmed in the wake of a lackluster spring home-selling season and a slowing U.S. economy.

In June, National Association of Home Builders Chief Economist David Crowe projected that single-family home construction will fall this year by 9 percent from last year to 431,000 — the lowest level on records going back more than a half-century.

Even so, some homebuilders say customer traffic is improving heading into the fall.

On Monday, Lennar CEO Stuart Miller told analysts that his company is still seeing building strength, in terms of people coming in. He said that trend is generally upward.

However, the executive stressed that demand for new homes remains constrained by the availability of financing and weak consumer confidence.

Lennar shares surged on Monday, but were among the few homebuilding stocks on a slide in afternoon trading on Tuesday.

The Miami-based builder's shares were down 17 cents to $14.30.

M/I Homes Inc. also was trading lower, slipping 7 cents to $7.38.

KB Home was the biggest climber, with shares up 28 cents, or 4.6 percent, to $6.37.

Elsewhere in the sector, D.R. Horton rose 25 cents, or 2.6 percent, to $9.81; PulteGroup rose 15 cents, or 3.4 percent, to $4.53; Hovnanian Enterprises Inc. added 2 cents to $1.41; Beazer Homes USA Inc. gained a penny to $1.81; Toll Brothers rose 22 cents to $16.06; NVR Inc. added $5.89 to $648; Standard Pacific Corp. gained 2 cents to $2.49; Meritage Homes Corp. rose 17 cents to $17.36; MDC Holdings Inc. added 75 cents, or 4.2 percent, to $18.53; and The Ryland Group Inc. rose 29 cents, or 2.7 percent, to $11.23.

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