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September Housing Starts Rise

Builders add inventory to an already crowded market.

Housing starts rose 5.9% from August to September, a higher rate than economists expected, signaling that homebuilders continue to add to the large inventory of homes for sale across the country.

Privately owned housing starts in September were at a seasonally adjusted annual rate of 1.77 million, compared with the upwardly revised estimate of 1.67 million in August, the Census Bureau said Wednesday. Economists expected 1.65 million starts.

The September rate was 17.9% below the level of a year earlier.

"In a period where you have to work through inventory, it's better to see supply go down," says Josh Spencer, an analyst with T. Rowe Price, which owns homebuilder stocks.

Nonetheless, he says the starts data is a lagging indicator and just reinforces the weak housing sales data

already announced for August. Spencer also says the standard deviation from the government data on starts is so high that the month-to-month jump doesn't mean much.

As well, the starts number is a bit ambiguous, since it doesn't say how many of the starts are from new orders and how many are simply homes being built without buyers lined up.

The Census Bureau also said that housing building permits in September fell to a seasonally adjusted annual rate of 1.62 million, which was 6.3% below the revised August rate and 27.7% below the year-earlier level.

Housing completions in September were at a seasonally adjusted annual rate of 2.08 million, 11.1% above the revised August level and 7.2% above the year-earlier rate.

Investors will get more news on the homebuilding sector when

Ryland

(RYL)

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reports results after the market closes Wednesday.

"I expect more of the same of what we've seen from other builders," says Spencer, whose firm owns Ryland shares. He expects the builder to report charges resulting from walking away from land option deposits.

Spencer also hopes to see some share buyback activity from the company, but says the company, like other builders, may now decide to hoard cash instead.

Recently

KB Home

(KBH) - Get KB Home Report

announced it had suspended its buyback program. Ryland has historically made buybacks a key part of its operating strategy.

On Tuesday, fellow homebuilder

NVR

(NVR) - Get NVR, Inc. Report

, another big buyer of shares historically, said it repurchased about 2% of its shares in its most recent quarter.

NVR also said its earnings fell 32% in the quarter, and the company slashed its full-year profit estimate.