M.D.C. Holdings ( MDC) traded down Tuesday as investors couldn't get excited about a decent upside in the homebuilder's third-quarter earnings report and instead focused on the latest inflationary data showing a spike in producer prices.

M.D.C., which warned investors last month to expect a lackluster performance in the most recent period, earned $121 million, or $2.62 a share, in the three months to Sept. 30, up from $105.1 million, or $2.36 a share, a year ago. Sales rose 14% from last year to $1.17 billion.

The Thomson First Call mean estimate for the quarter called for earnings of $2.56 a share on sales of $1.16 billion. M.D.C. also reiterated full-year guidance for earnings above the mid-September Wall Street estimate of $10.44 a share. Analysts have since revised their forecasts up to an average $10.59 a share.

The entire homebuilding sector fell Tuesday on concerns that the Fed will remain focused on rising interest rates to combat inflation. The producer price index jumped 1.9% last month, the biggest jump since January 1990 and above the estimate of 1.1%.

Part of the decline also may have stemmed from a surprisingly weak earnings report and outlook from American Standard ( ASD), which outfits new homes with kitchen and bath fixtures.

Tuesday afternoon, M.D.C. shares slipped 1.3% to $69.23, while the Philadelphia Housing Sector Index fell 2.5%. Fellow builder NVR ( NVR), which reported third-quarter earnings Tuesday morning that missed Wall Street estimates, fell 6.8% to $51.76.

"(Investors) like the company-specific information from M.D.C., but they're concerned that the PPI is another point for the bears (who believe) rates are going higher and housing is going to get crunched," says Lawrence Horan, an analyst with Janney Montgomery Scott, which doesn't provide investment banking services to M.D.C.

But Horan remains a bull on the sector and has buy ratings on all of the homebuilders he covers. "I believe that the numbers we're seeing and the concerns about inflation are temporary," he says. "It's something that will go away in three months, six months, maybe less. It's all about the damage the storms have done. There's got to be a lot of bad news priced into MDC."

On a conference call with investors, M.D.C. CEO Larry Mizel dodged two questions about why the company hasn't more aggressively bought back shares, given the recent drop in the stock's price. The company has the authorization to buy back 2.3 million shares but hasn't repurchased for over a year. "When the time is right, we will act on the authorization we have," he said.

M.D.C. said net its new home orders across the country grew 21% to 3,551 in the quarter, but drops were seen in Arizona, Colorado and Virginia. In Virginia, which isn't a major market for the company, orders were cut in half to 96. Mizel said the company remains focused on Virginia and the greater Washington D.C. area and blamed the recent drop on lower seasonal summer sales this year as opposed to last year, when the market was hotter. "The underlying characteristics of that market are still strong," Mizel said, citing job growth and land constraints

Mizel also said that as material costs shoot up -- with steel and copper rising 30% since Katrina, by his account -- the rise in constructions costs amounts to an additional "couple thousand dollars per house." However, thus far, the company has been able to offset the rising costs with higher home selling prices. The average selling price for the company's home closings in the quarter rose 10% year over year to $311,400.

Also on Tuesday, the National Association of Builders/Wells Fargo Housing Market Index reported that builder confidence in the market for newly built single-family homes rebounded by a couple of points in October to the same level at which it was gauged prior to hurricanes Katrina and Rita.

"This is a reassuring sign that builder attitudes are bouncing back from the initial shock of the hurricanes' devastation and the economic uncertainties immediately following those storms, even in the midst of higher mortgage interest rates," said NAHB President Dave Wilson, a custom home builder from Ketchum, Idaho, in a statement.

"At the same time, the fact that the confidence level remains below the mid-year high may indicate that builders see the market finally beginning to plateau at a slightly slower, but quite healthy, pace," noted NAHB's chief economist, David Seiders, in a statement.

The sector will get more news when Ryland ( RYL) reports earnings after the market closes Tuesday.

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