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HOW TO PLAY IT-Dipping into the noisy U.S. housing market

NEW YORK, Aug 19 (Reuters) - The U.S. housing market roared in July, but investors may want to tiptoe rather than jump into the sector, analysts and fund managers say.

That is because much of the 15.7 percent increase in new home construction in July, the first gain in two months, came from apartment buildings, which tend to attract lower income renters and do not generate as much overall economic activity as single-family homes, analysts said.

Furthermore, the solid activity reported in new construction and by Home Depot Inc in its quarterly report on Tuesday may in part be due to activity delayed by bad weather in the first quarter.

The appeal of apartments to millennials, a generation laden with student loan debt that may make it difficult to afford a down payment on a home, is one reason why some noted investors, such as DoubleLine Capital's Jeffrey Gundlach, have said they are betting against the shares of homebuilders.

Fannie Mae on Monday downgraded its outlook for home sales and construction, estimating that 1.4 million single-family units will be constructed during 2014 and 2015 combined, compared with an earlier forecast of 1.6 million units.

"From an investment standpoint the homebuilder trade has been one of the most hotly anticipated trades over the past few years. Yet it continues to be nothing spectacular," said James Liu, a global market strategist at JP Morgan Funds.

Fund managers, as a whole, are not taking a rosy view of the homebuilding segment. Actively managed U.S. mutual funds, on average, devote just 1.06 percent of their portfolio to companies such as Toll Brothers Inc and KB Home, according to Lipper, a Thomson Reuters company. That was unchanged from the end of 2013.

Yet analysts and strategists say that there are attractive pockets of the housing market.

Phil Orlando, chief equity strategist at Federated Investors , built up positions in select retail stocks throughout the summer in expectation that a slowly improving housing market would help retailers such as Home Depot and apparel and home fashion company TJX Cos Inc, parent of TJ Maxx and Homegoods.

Both companies should benefit not just from new home construction, which accounts for approximately 8 percent of the housing market, but from rising home prices, which could spur homeowners to upgrade their appliances or otherwise put more money into their homes, he said.

"I'm very comfortable that when the dust settles we will see a resurgent consumer in the back-to-school season," he said.

Home Depot on Tuesday reported a higher-than-expected 6.4 percent increase in same-store sales in the United States and raised its full-year forecast. Shares of the company are up nearly 8 percent for the year, or nearly 1 percentage point more than the broad S&P 500 index.

To be sure, some investors have already done very well betting on a 2014 multi-family housing market. Exchange-traded funds focusing on residential real estate investment trusts, which typically hold apartment buildings and other multi-family developments, have been on a tear this year. The iShares Residential Real Estate Capped ETF is up 22.3 percent year-to-date, while the Vanguard REIT ETF is up 17.6 percent.

Those gains raise the possibility that shares of the companies in the multi-family sector already reflect the boom in apartment buildings and have little room to run, analysts say. "The data remains inconclusive and uneven, and that's the nature of the housing recovery right now," said Dan Veru, chief investment officer at Palisade Capital.

(Reporting by David Randall, with additional reporting by Ashley Lau; Editing by Linda Stern and Steve Orlofsky)