Homebuilders' shares unexpectedly rallied late Wednesday following a broad market rebound.

Builders' shares had been in the red earlier in the day, after one major analyst turned very cautious on the housing sector and downgraded a host of major names. But a late-day boost, likely helped by short-sellers covering their positions, sent the Philadelphia Housing Index up 3.3%.

Shares of Pulte Homes ( PHM) rose 6.1% to $37.33, and Centex ( CTX) jumped 5.5% to $64.11

Even two builders that were downgraded to sell early Wednesday -- M.D.C. Holdings ( MDC) and NVR ( NVR) -- finished the day in the black, up 3.9% and 2.4% respectively.

In his report titled "It'll Get Worse Before It Gets Better," released early Wednesday, Bank of America homebuilding analyst Daniel Oppenheim downgraded the entire homebuilding sector. He cited evidence from his firm's October real estate agent survey that "points to deteriorating trends in most markets," including "traffic levels that are well below expectations, a meaningful slowdown in home price appreciations, and a build-up of inventory of homes for sales, which likely indicates further weakness in pricing trends in the months to come."

Hovnanian ( HOV); Toll Brothers ( TOL); and Ryland ( RYL), which reported earnings Tuesday , were all cut to neutral from buy by Oppenheim, who also cut the ratings on M.D.C. and NVR.

Oppenheim expects homebuilders as a group to report 11% EPS growth in 2006, down from his prior 15% estimate. He anticipates further downside in homebuilder stocks based on the potential for margin erosion and downward 2006 earnings estimate revisions.

He also believes P/E multiples may fall further for the group, possibly even hitting their prior trough valuation of five times forward earnings. "This implies approximately 17% downside from current levels," he wrote.

Oppenheim's new price targets for the group are based off P/E multiples of six, rather than the previous 7.2.

Oppenheim says any improvement in inventory and pricing trends would make him more positive on the group.

For M.D.C., Oppenheim is concerned about the company's exposure to "frothy markets" in Arizona, Nevada and California. "While M.D.C.'s core markets are currently some of the strongest, they're also among the most stretched in the country in terms of affordability, which could limit future price appreciation and margin expansion," he writes.

For NVR, Oppenheim is concerned about the builder's heavy exposure to the Washington, D.C., market, which has "pronounced weakness" according to his survey of real estate agents in the area. NVR will derive 30% its 2005 revenue from D.C., by Oppenheim's account.