UPDATE 2-U.S. homebuilder shares rise despite sales dip

* Homebuilder index up 2.3 pct

* KB Home shares up 5.3 pct

* New home sales fall 32.7 pct (Recasts; adds analyst quote, byline)

By Helen Chernikoff

NEW YORK, June 23 (Reuters) - U.S. homebuilders' shares shook off two days of disappointing sales data to rise on Wednesday as investors scooped up shares on the assumption that the worst was over.

Sales of new homes in May fell to the lowest level ever, the Commerce Department said on Wednesday, but after an initial dip, the Dow Jones U.S. Home Construction Index .DJUSHB rose to 2.3 percent by mid-afternoon.

"It would be tough to get much lower in terms of sales when you look at the absolute level of sales here," said Credit Suisse analyst Dan Oppenheim.

KB Home (KBH.N) shares were up about 5.3 percent at $12.52 apiece, while Ryland Group (RYL.N) rose 5.8 percent to $16.50.

"This data point represents the nadir for bad housing news," Ticonderoga Securities analyst Stephen East wrote in a note to clients. He anticipates a slow, gradual upward climb for sales.

"We do not believe such a low level of sales is the new market reality," he said.

Still, home prices will fall, as builders reduce them to generate sales.

The Commerce Department said on Wednesday that single-family home sales tumbled 32.7 percent in May to a 300,000-unit annual rate, the lowest level since the series was started in 1963. [ID:nLDE65M1WY]

In addition, anecdotal evidence shows that June has been weak as well, Oppenheim said, citing a survey of real estate agents showing a continued decline in buyer traffic.

Luxury builder Toll Brothers Inc (TOL.N) said the same thing last week, issuing a statement that deposits were down 20 percent as high unemployment and other negative headlines such as the oil spill in the Gulf of Mexico shook consumer confidence.

Builder shares fell on Tuesday on worse-than-expected existing-home sales, which declined 2.2 percent in April compared with expectations of a 7.5 percent increase, according to a note from Raymond James analyst Buck Horne. (Reporting by Helen Chernikoff; Editing by Matthew Lewis and Maureen Bavdek)