) -- Homebuilders began construction on 4.3% fewer homes in December, worse than the expected growth rate, while applications for building permits spiked 16.7%, pointing to potential strengthening in demand for future homebuilding activity.

The Commerce Department said early Wednesday that housing starts came in at a seasonally adjusted annual rate of 529,000 in December. The figure compares with an

upwardly revised rate of 553,000 housing starts in November and came in worse than the rate of 550,000 economists had expected, according to consensus estimates listed on


. November's housing starts rate was originally reported at a pace of 555,000.

>> 10 Top Buy-Rated Real Estate Stocks for 2011

Applications for building permits spiked 16.7% to a seasonally adjusted annual rate of 635,000, much higher than the revised November rate of 544,000. November's building permits rate was originally reported at 552,000.

Building permits are viewed as an indication of future home construction.

On Tuesday, the

National Association of Homebuilders' index of builder sentiment came in flat month-over-month at a reading of 16. It was the third consecutive month of flat homebuilder sentiment as interest among potential buyers remained sluggish.

The NAHB's confidence index, which measures builder perceptions of current single-family home sales and sales expectations for the next six months, has not come in with a positive reading since April 2006. Any reading below 50 indicates poor sentiment.

"As we emerge from the traditionally slow holiday season, builders continue to look for signs of improvement in the economy, home buyer demand and builder and consumer credit conditions," said 2011 NAHB Chairman Bob Nielsen, a home builder from Reno, Nev. "Unfortunately, a severe lack of construction financing, and widespread difficulties in obtaining accurate appraisal values, continue to limit builders' ability to prepare for anticipated improvements in buyer demand in 2011."

NAHB Chief Economist David Crowe said that "At this point, housing remains on the sidelines of a weak economic recovery as consumers and builders wait for clear and consistent indications that jobs and economic output are reviving. Meanwhile, the problems that builders continue to confront in obtaining production financing, and in maintaining performing lines of credit, threaten to significantly slow the onset of a housing recovery."

Stocks in the homebuilder sector were mostly lower Wednesday morning.


SPDR S&P Homebuilders

(XHB) - Get SPDR S&P Homebuilders ETF Report


iShares Dow Jones US Home Construction

(ITB) - Get iShares U.S. Home Construction ETF Report

, exchange-traded funds that track the sector, fell 0.6% and 0.4%, respectively, in premarket trading.

Among individual builders,

Toll Brothers

(TOL) - Get Toll Brothers, Inc. Report

was 0.7% lower ahead of the opening bell.

Toll Brothers surprised investors with a return to year-over-year profitability in its fiscal fourth quarter, and recently said deposits jumped 10% in the second half of November compared with year-earlier results.


(LEN) - Get Lennar Corporation Class A Report

lost 0.2%. Last week,

Lennar posted better-than-expected fiscal-fourth quarter earnings but said new-home deliveries were down 12%.

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Small-cap builder

KB Home

(KBH) - Get KB Home Report

fell 0.4% early Wednesday morning.

KB Home recently posted a surprise quarterly profit and said fewer homes delivered in its recent quarter was partially offset by an increase in the average selling price.


D.R. Horton

(DHI) - Get D.R. Horton, Inc. Report

added 0.2% and


(PHM) - Get PulteGroup, Inc. Report

fell 0.2%.

Hesitancy among potential home buyers has been a key driver of builders' low sentiment in recent months as uncertain consumers did not yet feel secure enough with the jobs market and overall economy to make such large purchasing decisions.

Pending home sales rebounded 3.5% in November but remained 20.5% lower than in the year-earlier month. Data on December's pending home sales is expected to be reported on Jan. 27.

New-home sales rose 5.5% in November but were 21.2% below year-earlier levels. Sales of newly built homes are expected to have risen to an annualized rate of 300,000 in December, from 290,000 in December. January's new-home sales data is expected to be released on Jan. 26.


Written by Miriam Marcus Reimer in New York.

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