Housing starts are stronger than anticipated; stocks rebound.

By Daniel Walker Guido

An enormous horde of eager economists continues to put forth erroneous reports filled with egregious errors that all but demand the last solid pillar propping up the economy--the housing industry--stifle its hammers and hang up its tool belts.

In short, home builders continue to post record profits, starts remain 2 percent higher than last year's record, and housing stocks have rallied. Near record low mortgage rates and a rebounding consumer confidence level continue to drive demand. Housing may be battered and bloodied by premature reports of its demise, but it remains standing, unbowed, keeping the nation's economy from slipping over the side of the growing economic abyss. Yet half of Wall Street's home building analysts remain cautiously optimistic.

"While we are impressed by the extraordinary resilience of the housing market, we have some very real concerns that housing activity will deteriorate once the initial effects

of lower rates are through the system," says Ian Jacobs, home building analyst for Wall Street investment bank Goldman Sachs. "Given the worsening macroeconomic environment, we remain cautious on the group."

Ivy Zelman, home building analyst for Wall Street investment bank Credit Suisse First Boston, also is a bit skittish, saying that "despite the generally favorable rate environment, we maintain our neutral stance on the home builders (stock) given deteriorating industry fundamentals such as employment growth."

Others remain bullish. "Overall we are surprised by the strength indicated in recent releases as we had expected October's housing data to reflect more definitive weakness," says Stephen Kim, home building analyst for Wall Street investment bank Salomon Smith Barney. "At this point, investors should probably begin to consider the possibility that we may never get a meaningful downturn in housing demand before the economic growth resumes." Kim added that if housing continues to do well throughout the downturn and emerges on top, a lot of investors are going to wish they got in now while the getting is good.

Kim notes that four major changes in the housing industry have yet to be priced into the home building groups' valuations, including unprecedented growth in the market share of the top builders, extremely low inventory levels, more conservative balance sheets, and a striking improvement in the industry's economic value added performance.