Shares of Home Builders Up on "Buy" Ratings, Housing Starts

The good news continues to roll in for home builders, who hope they've hit bottom and are in recovery mode.

Early Wednesday, Bank of America Merrill Lynch started seven builders at "buy," a bullish view based "on an expectation of volume growth in 2010 driven by improving economic conditions, which should more than offset any drag from the fading out of government stimulus programs."

That helped boost shares of several builders in early trading: Hovnanian Enterprises (HOV) led the sector with a 3.9% gain, while Beazer Homes (BZH) gained 0.9%. Lennar (LEN) was off 0.5%.

It also helped that U.S. home construction rose during January as builders recovered from a bout of bad weather. Housing starts climbed 2.8% to a seasonally adjusted 591,000 annual rate compared to the prior month, the Commerce Department said Wednesday. Single-family groundbreakings and apartment construction both rose.

Economists surveyed by Dow Jones Newswires forecast a 5.9% increase in January housing starts, to an annual rate of 590,000. The pace of 591,000 was the strongest since July 2009: Housing starts have gone up three times in the last six months.

Year-over-year, housing starts in the U.S. last month were 21.1% higher than the pace of construction in January 2009.

This comes after the National Association of Home Builders Tuesday reported that its housing-market index, a measure of confidence, climbed two points to 17 out of 100 in February.

"The housing market continues to show signs of stabilization. ... With new home supply running at the lowest levels since the early 1970s, builders are running lean and mean--making it likely that we've seen the worst of the construction downturn," wrote Mike Larson, real estate and interest-rate analyst with Weiss Research. "At the same time, a vigorous upturn is unlikely. The supply of "used" homes on the market is still elevated, and distressed property will continue to be parcelled out by agents, banks, and other lenders over time. Until that supply is exhausted, construction activity will remain muted."

Indeed, the government report suggested continuing trouble ahead for the housing sector, which continues to grapple with elevated unemployment, continued foreclosures and concerns of softening as the federal tax credit for buyers expires April 30.

Building permits, a sign of future construction, in January tumbled 4.9% to a 621,000 annual rate. Economists had expected permits to stumble by 3.1% to a rate of 633,000.

"Home construction is still struggling at very low levels as the overhang of housing units is still being worked off," said Insight Economics analyst Steven Wood.

-By Dawn Wotapka, Dow Jones Newswires; 212-416-2193; dawn.wotapka@dowjones.com

(Jeff Bater contributed to this article.)

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