It’s an unlikely sector to lead the market in early, mid- or late trading, but homebuilder stocks took the bear by the horns today.

The fact that the Fed kept interest rates near zero on Wednesday, saying that the pace of the recession is slowing, gave homebuilders optimism that a bottom may be closer than originally thought.

Another government report showed the first-quarter gross domestic product growth shrank at a slower pace than initially thought. GDP shrank at an annual rate of 5.5% versus the initially reported 5.7% decline.

Hey, even not as bad as expected news is better than the alternative.

For example, Homebuilder Lennar Corp. (AMEX: LEN) reported a larger-than-expected quarterly loss and a smaller-than-expected drop in revenue. Shares rallied 16%.

In fact, in Indio, a small city east of Los Angeles, the supply of foreclosed houses for sale is plentiful. Even so, work crews are finishing a batch of new homes for Lennar Corp.

While the recession wiped out many small builders, mortgage lenders and homeowners, the nation's biggest builders have hung on, in part through favorable land deals, loan agreements and tax strategies.

Now, the worst appears to be over for most of them. Nationwide, new-home sales are showing signs of bottoming out. The stocks of the big homebuilders have rebounded from their November lows,

In recent months, homebuilders have grown more optimistic and said they see signs that the end of the housing market's three-year downward spiral may be near.

Some analysts think new single-family home sales hit bottom earlier this year and are gradually increasing.
As a result, homebuilders are starting to move higher: Meritage Homes Corp. (NYSE: MTH) is up 88% since March lows and has traded above its long-term 200-day moving average since late April, and The Ryland Group Inc. (NYSE: RYL) has risen 41% since March lows.

I don’t think that now’s the time to buy the above stocks, but if all the stars align, this sector will catch fire and catch fire quickly.