Homebuilding stocks rally on slower building activity

Homebuilders' stocks rallied Wednesday after the government reported fewer people are building homes _ suggesting the housing market may be able to clear some of its overstocked inventory in the coming months.

The Commerce Department reported builders began work on 947,000 homes in March, an 11 percent decline from February and a 36.5 percent decline from March of last year. Permits authorizing new building also slipped 40.9 percent in March from March 2007.

Normally a subdued pace of construction would be considered bad news, but with the housing market mired in its third year of a slump, a downturn in construction is perceived as good news. At the current sales rate, it would take nearly 10 months to clear the supply of unsold homes from the market.

James McCanless, an analyst with FTN Midwest Securities Corp., said less building means fewer unsold homes coming to market.

Along with cheaper home prices, the lighter building activity should help shrink inventory to "more reasonable, market-friendly levels," he said.

"Even though these are certainly multiyear lows, we think it's the proper level of starts for helping to improve the housing situation," he said.

But McCanless cautioned against calling the "bottom" investors have been searching for in the housing market for more than a year. Fewer homes for sale would make business easier for homebuilders, he said, but would not alone re-ignite the market.

Still, shrinking inventories could be the first step toward a recovery, he said.

The Philadelphia Stock Exchange Housing Sector Index spiked about 1.2 percent in afternoon trading Wednesday. The index is still down more than 40 percent since the beginning of last year and 50 percent since the peak in mid-2005.

Every major homebuilder's stock climbed Wednesday, including Pulte Homes Inc. gaining 6 percent, Beazer Homes Inc. adding 7.4 percent and Standard Pacific Corp. vaulting 9.5 percent.

Wachovia Capital Markets analyst Carl Reichardt said weaker construction activity should help the homebuilders. However, data lately has shown that taking supply off the market is not enough to stimulate demand.

Despite lower prices, the market remains hampered by dour sentiment and low consumer confidence, he said.