(Housing starts story updated for homebuilder stock trading, analyst commentary)

NEW YORK ( TheStreet) -- Housing starts fell in June by 5%, more than forecast by economists, and the latest sign of weakness in the U.S. residential housing market after the end of the federal homebuyer tax credit.

Housing starts were down in June at 549,000, 5% below the revised May estimate of 578,000, and 5.8% below the June 2009 rate of 583,000, according to the month U.S. Census Bureau data. The June housing starts level was the lowest since last October.

A Dow Jones survey of economists had predicted a decline in housing starts of just over 3%.

Single-family housing starts in June were at a rate of 454,000; 0.7% below the revised May figure of 457,000.

The weak housing starts data was the latest in a recent series of negative economic indicators for the beleaguered housing sector.

Building permits in June, though, were at a rate of 586,000, 2.1% above the revised May rate of 574,000, but worse than the level from a year ago, 2.3% below the June 2009 estimate of 600,000.

It was the first gain since March for building permits, suggesting that new construction activity would increase in the coming months.

The building permits rise partially offset the latest in the bad news delivered on the housing sector. On Monday, the latest national survey of homebuilder sentiment showed the lowest level of confidence since April 2009.

The latest data from the housing market didn't give the markets a lift on Tuesday morning, but the building permits increase seemed to provide a lift for the weak homebuilder stocks. The building permits increase in June signalled that construction activity will pick up in the months to come.

Trading in shares of major homebuilders rose on Tuesday morning, with LENNAR ( LEN), PulteGroup ( PHM), KB Home ( KBH) and Toll Brothers ( TOL) up more than 2%.

It was a minor rally for homebuilder stocks, many already trading at or near book value, and at least one analyst thought the stocks were rallying for the wrong reason. Stifel Nicolaus analyst Michael Widner put out a research note on Tuesday morning saying that the real mover in the building permits increase was multi-family homes. Single family home permits were not the driver, and yet, single family homes are much more important to the outlook for homebuilders.

The Stifel Nicolaus analyst wrote, "We have been searching for a catalyst for the space lately, and unfortunately this one looks like more noise than signal to us.... On the surface we were initially pleased to see the permits number come in ahead of our 550K expectation, but after examining the details of the data we were left unenthused."

Additionally, Stifel's Widner wrote that the weak homebuilder sentiment released on Monday "is at least as good and current an indicator of builder intentions as permits."

In fact, the analyst wrote that his fears of a double dip in housing have intensified.

The Stifel Nicolaus analyst took down estimates for the June quarter homebuilder order activity, and 2010 and 2011 homebuilder estimates, writing, "We have been relatively bearish for several years now, expecting a slow and protracted recovery in both housing and the broader economy. We had not anticipated a substantive double dip, however, but the confluence of dismal buyer activity, lack of response to all-time low mortgage rates, disappointing employment trends, limited success of mortgage modification programs, political gridlock building in DC, a renewed downturn in consumer sentiment, successive monthly declines in retail spending, and the specter of rising taxes adding another potential wet blanket to economic activity give us pause."

-- Written by Eric Rosenbaum from New York.

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