For home builders, the third time is not the charm.

After climbing for two consecutive months, the monthly National Association of Home Builders/Wells Fargo Housing Market Index dipped by 1 point to 15 out of 100 in June, showing the fragile market must continue its search for stability as it limps through the worst downturn in decades.

The rating is well below December 1998's high of 78, but nearly double the low of 8 in January.

"I'm not saying that home building is still headed straight down like it had been for months and months, but I'm hesitant to say that we're bouncing off the bottom," said Joe Snider, a vice president and senior credit officer with Moody's Investors Service. "I think it's more a case of we're crawling along the bottom."

That the end is not in sight weighed on the battered sector's stocks Monday afternoon. Standard Pacific (SPF) led the decline, its shares plunging nearly 11% to $2.13, while Hovnanian Enterprises (HOV) fell 5.9% to $2.40 and KB Home (KBH) lost 6% to $13.25. The Dow Jones US Home Construction Index was recently down by 2.52%.

The unexpected decline - some industry watchers expected it to at least hold steady - shows recent optimism has been dashed as mortgage rates tick upward and the industry faces the possibility of losing two tax credits that have boosted customer traffic. The federal $8,000 credit is for qualified first-time buyers closing before Dec. 1, and there's up to $10,000 for buyers of new homes in California -- funds that are said to be nearly exhausted. Freddie Mac (FRE) data, meanwhile, showed the average on a 30-year mortgage loan was 5.59% last week - 73 basis points higher than the average four weeks earlier of 4.86%, an advance that could hurt housing demand.

The sector also finds itself competing with mounting foreclosures, "which are being given away at a song," Snider pointed out. There's plenty to compete with: Barclays Capital estimates new foreclosures started this year at 2.8 million, with three million expected in 2010. Foreclosures and other distressed deals - some even built by the builders themselves - are weakening appraisal values, forcing builders to either cut the price or risk losing a valuable deal.

The closely watched NAHB index, which has gauged builder confidence for more than two decades, did see some stability. Two of the three component indexes were unchanged, including the index gauging current home sales - steady at 14 - and the one measuring traffic of prospective buyers, which remained at 13. But the index measuring expectations for the next six months slipped one to 26, which "points to some waning optimism regarding demand trends," noted JPMorgan analyst Michael Rehaut. "Given continued tight credit conditions, rising foreclosure trends, and still relatively weak demand amid the current challenging economic environment, we believe this component will likely continue to fall over the next several months," he added.

Regionally, the decline was focused in the South, the nation's largest housing market. It fell 3 points to 15, something the trade group is unable to explain. The Northeast, which is seeing weakness from the financial meltdown, climbed one point to 20. The West added two points to 14.

Another report detailed similar weakness. In its June survey, John Burns Real Estate Consulting said 306 building executives from more than 200 companies reported sales remained "very weak" in May, and that prices continue to decline.

"Builder contacts in a few locations are telling us that traffic and sales are off in the first weeks of June, and they suspect the end of the spring selling season may be near," said Jody Kahn, vice president of the Irvine, Calif.-based firm.

Kenneth Leon, an analyst with Standard & Poor's Equity Research, said the results gauge sentiment and he's waiting for data on housing starts, which he considers a better barometer of the industry's health, before deciding if recovery has stalled.

"We're talking about the mood swings of home builders," he said. Housing starts are "measured economic data."

-By Dawn Wotapka, Dow Jones Newswires; 212-416-2193; dawn.wotapka@dowjones.com