THE NUMBER OF SPEC HOMES—those builders start, and sometimes finish, before selling them—is rising. According to the U.S. Census Bureau's new-home sales data, the total number of homes for sale in May hit 439,000, 15.8 percent higher than a year earlier.

Industry analysts are keeping a close watch on the data series. “The number of homes available for sale is concerning [to us] right now,” says Rick Murray, an analyst with Raymond James and Associates. Murray worries more about the number of homes for sale that are under construction or already finished—349,000—than about those that haven't yet been started, he says. That figure has increased 7.7 percent since May 2004.

Spec-home inventories attract attention—and anxiety—due to the role they played in the last round of regional housing market busts. In the 1980s and early 1990s, many builders took substantial losses on heavily discounted homes they'd already built, just to sell them.

Others aren't alarmed by the tick upward in spec homes. Some parts of the country, such as the Midwest, traditionally operate with higher levels of spec inventory, says Steven Hays, partner-in-charge of the Home Builders Services Group at St. Louis–based Rubin, Brown, Gornstein and Co., a management consulting firm. About 27.5 percent of the homes being built in the St. Louis market are not pre-sold, a figure that's risen several points in the last few years; Hays expects it to hit 28 percent by the end of 2005.

That increase doesn't bother him, he says, because the models the builders choose to build as specs tend to be their best sellers. “Those who are good at building specs have the best opportunity to enhance their bottom line, because they're building a house they've built before, a model with a good margin, and one that's timely to build. They're dealing with proven winners,” he says. He's further encouraged by banks that continue to watch spec inventory closely and restrict the number of spec homes they will make construction loans for.

More-capitalized builders have additional freedom, but many are risk averse and wary of spec building, says Murray. This year's top 10 of the BUILDER 100 are all public companies; as a group, they closed 20 percent of all homes nationwide last year. That fact alone reassures Steven Friedman, national director of Ernst and Young's housing industry segment. “Most public builders have a policy: ‘No contract, no construction,' ” he says. “I can't think of any public builder that looks for a spec inventory.”

STEADY STARTS: Total housing starts held even at a rate of 2.004 million in June. Growth in multifamily starts made up the ground lost by single-family starts, which were down 2.5%.

RELATIVE GAIN: The Census Bureau revised April's new-home sales downward by 3.4%, making May a month of growth, comparatively. Sales in the Midwest were up 22.9% in the month.

MIXED FEELINGS: Overall, consumers felt more positively in June. But more home buyers cited high prices as a reason it's a bad time to buy.

REGIONAL RIPPLE: The South was the only region to post a gain in June across both total and single-family starts. The Midwest and West experienced double-digit declines.

PRICING POWER: May home buyers might have enjoyed some better deals, as the median price of a new home dropped 6.5% and the pace of existing-home appreciation slowed.

INCH BY INCH: Fixed mortgage rates began to creep up after falling in previous months. One-year ARM rates are at their highest point in more than two years.

NO LETUP: Builders seem not to be planning to slow the pace of building later this year, as they pulled enough permits in June to keep the annual rate well above 2 million.

SALES SLUMP: Builders' confidence slipped in July, as fewer answered positively about current and future sales. Midwest builders continue to be the least optimistic.

BACK DOWN: Another month brought more volatility to lumber prices, as both OSB and framing lumber costs fell in July after rising in June.