(Updated to include movement in homebuilder stocks)

WASHINGTON, D.C.( TheStreet) -- October housing starts reversed an upward trend, falling to their lowest level in six months. The news out of the home construction market was doubly disappointing, as permits for new home construction also fell 4% to 552,000, well short of analysts' forecast of 580,000 units.

Just when we thought we were out of the woods.

The Commerce Department report showed that housing starts fell 10.6% to their lowest level since April, or to 529,000 units. A Reuters' analysts' poll had estimated 600,000 units. Instead, the report delivered the biggest percentage drop since January. In September, there were 592,000 housing starts.
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The housing market has been sending mixed signals throughout its modest comeback. The September numbers, for example, showed a rise in new starts, but that came alongside a drop in permits.

While both housing starts and permits fell in October, the monthly numbers may end up being less distressing than they at first suggest: the looming expiration of the federal tax credit for first-time home buyers -- expected to expire at the end of October, but since renewed -- might have temporarily put a scare into, and freeze on, builders' appetites. The tax credit has been a big boon to the sector's turnaround.

Homebuilders are still evincing confidence, too. Citigroup recently raised its price outlook on Toll Brothers ( TOL) from $23 to $25, citing unexpected upside in the stock. Toll's preliminary quarterly results, released last week, indicated that orders were up 42% versus the year ago period. The builder confidence index from The National Association of Homebuilders remained unchanged in October.

Even after the disappointing housing news broke, trading in homebuilder stocks remained mixed in the mid-afternoon.

There were many marginal losers, including Toll Brothers, down slightly (-0.62%); Meritage Homes ( MTH) (-0.36%); M.D.C. Holdings ( MDC) (-0.19%); and M/I Homes ( MHO) (-0.75%).

The outlier on the positive side was Pulte Homes ( PHM) up 3.45%. Ryland Group ( RYL) was also up 0.55%.

On the pessimistic front, Brookfield Homes ( BHS) and Comstock Homebuilding ( CHCI) were down 4.05% and 5.95% respectively, mid-afternoon. Orleans Homebuilders ( OHB) was down (-1.91%).

Brookfield had been trending up all week before giving back those gains in the morning session. Comstock had also trended up since announcing earnings on Nov. 9, but gave back some of those gains since the post-announcement surge.

Even as the sector is putting its best face forward and fears of the tax credit expiration dissipate, labor market woes were also likely a big factor in the housing dip. With economists forecasting an unemployment rate staying at or above 10% for the first half of 2010, the job market's influence on new construction is likely to remain high on the list of reasons to expect more mixed signals from housing.

-- Reported by Eric Rosenbaum in New York

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